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Panic ruled the roost in the bond markets on Tuesday. The yield on bonds shot up the most in four-and-a-half years on large scale selling by market players including some mutual funds as Reserve Bank of India (RBI) put curbs on liquidity to quell volatility in currency markets.
Treasury executives said RBI’s Monday night decisions to contain speculation in the rupee weighed heavily on trades. It was a clear call to sell, pushing bond yields up. The conditions were very volatile.
The benchmark 10-year bond yield surged 52 basis points to close at 8.1 per cent, its biggest single-day rise since January 7, 2009, when the yield had risen by 71 basis points, according to Reuters data.
“It reflected extreme response in a state of panic. While uncertainty remains high, we might not see a repeat of extreme positions when market open on Wednesday,” said a senior treasury official with State Bank of India’s associate bank.
Banks put in redemption requests with liquid and gilt schemes of mutual funds to create liquidity for themselves as ceiling on borrowings at RBI window would set in on Wednesday.
As a consequence, some mutual funds were forced to sell the papers (government bonds) even at discount. This pushed the yields on bonds across maturities.
“Most of the withdrawals would have happened in the liquid fund category. Banks would naturally turn to their surplus investments to meet their needs. This would have an incremental effect on yields," said the chief investment officer of a domestic mutual fund.
“Dynamic bond funds which hold paper of longer duration would take a valuation loss on account of the rise in yields,” said a fund manager.
N S Venkatesh, head of treasury and chief general manager, IDBI Bank said the selling spree in bonds pushed the yields sharply up. Some stability would return to the market once redemption pressures subside.
RBI actions might stay in vogue for some time to come. Ananda Bhoumik, senior director with India Ratings and Research said RBI sought to curb rupee volatility by tightening liquidity and reduce speculative positions in the currency. These measures might well continue for some time. This is considering the global uncertainties surrounding monetary tightening in the US and in particular, India’s vulnerability from its elevated current account deficit, he added.
RBI has asked banks to ensure they have sufficient collateral securities in their accounts before submitting bids to borrow under the repo window.
The central bank on Monday had announced it would cap the extent to which banks could borrow money from the RBI at Rs 75,000 crore, effective Wednesday.
