Banks face treasury losses as bond yields harden

Yield on 10 year bond at 7 month high

Rising bond yields since the month's beginning have triggered stop-losses for banks and made borrowing by bonds expensive for companies.

The yield on the 10-year benchmark bond has risen by 27 basis points (bps) since the start of this month and experts say it would rise further in the days to come, tracking international bond yields and due to monsoon concerns on the domestic front.

The yield on the 10-year benchmark ended at 8.09 per cent on Thursday, close to the level earlier seen on November 28, 2014. On Wednesday, the yield had closed at 8.03 per cent. That on the new 10-year bond ended at 7.88 per cent, compared with Thursday's 7.83 per cent. Since the start of this month, the yield had risen by 24 bps.

  “Traders have been cutting their positions and there is not much scope to buy bonds in the held-to-maturity segment. Banks are booking losses in their treasury portfolio. They'd booked profits in the quarter ended March and as of now, that trend has got reversed,” said Anoop Verma, vice-president (treasury) at DCB Bank.

He believes if the monsoon gets delayed by another week, the situation will get complicated. Beside, the liquidity situation might tighten due to corporate advance tax outflows later this month.

The Street also awaits the outcome of the US Federal Reserve's open market committee meeting on June 16-17. There are concerns on the Street that the Fed might start raising interest rates sooner than expected. If that happens, outflows will increase from debt as well as equity from emerging markets; India will not be an exception.

The rising yields have also led to a rise in the cost of borrowing for bond issuers, due to which they're going slow on this.

“In the Reserve Bank's monetary policy review (June 2), the guidance was hawkish and there are concerns that there might be an extended pause on interest rates, due to which investors of the bonds have become pessimistic. The coupon rates have also gone up, due to rising bond yields. After the monetary policy review, coupon rates have risen by 30-40 bps in over three-year maturity tenures,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

The central bank had cut the repo rate, at which banks borrow from it, by 25 bps to 7.25 per cent. Governor Raghuram Rajan had highlighted three key concerns which could impact inflation. One was the weather department's prediction of a below-normal monsoon, due to which astute food management is needed to mitigate possible inflationary effects.

In the past, softening oil crude prices had contributed to easing of inflation. Rajan said these had recently been firming amid considerable volatility, with geopolitical risks ever present. And, volatility in the external environment could impact inflation, said Rajan.