The ongoing spurt in government bond yields, despite a recent rating upgrade by Moody's and growth revival, defies logic and is driven by profit-booking, says a report.
The government bond yield has been on a roll of late and is hovering around 7 per cent, which is around 30-35 basis points higher than in the first half of FY18.
Despite government remaining committed to fiscal prudence and Moody's upgrading the sovereign ratings a fortnight back citing structural reforms and growth revival, the bond market surprisingly is still not rallying, noted am SBI Research report today.
"Even as the equity and currency market are basking in the glory following the rating upgrade, the bond yields are surprisingly witnessing significant upward movement, which can only be defined as irrational exuberance and profit-booking," the report said.
After the Moody's rating upgrade early this month to Baa3 with a stable outlook, some market players bought securities and now they are offloading them in the market, driving up yields, argued the report as the primary reason for the spurt in yields.
The rise in bond yields is also due to unwarranted talks about rate hikes by the Reserve Bank as inflation remains sticky and may cross the 4 per cent mark in November, adding to bond market fears.
In October, retail inflation inched up to 3.58 per cent from 3.28 per cent in September.
"We believe such talks of rate hikes defies common sense, logic and are analytically self-defeating as we expect FY18 inflation to average at 3.6 per cent and at 4.4 per cent for FY19, both of which are well within targets," it said.
As per the report, inflation is likely to stay in the 4.5-5 per cent range between January and June 2018, before declining to 4-4.5 per cent between July and December 2018.
It said the results of 2,795 listed corporates in the second quarter show a growth of 3.8 per cent, which shows the economy is on the mend. It expects second quarter GVA to come in at 6.1-6.2 per cent and GDP at 6.3-6.4 per cent.
"This should also have a sobering impact on bond yields going forward," concluded the report.
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