Bond yields fall the most since September 2020 as crude oil prices fall
Bombay : The yield on 10-year government bonds fell the most in 19 months as traders rushed to cover their short positions amid falling oil prices and US Treasury yields. The yield fell 12 basis points to 7.04% late in trading Monday.
However, stocks fell for a second straight day on the prospect of aggressive rate hikes from the US Federal Reserve. Future Group companies fell after Reliance Industries Ltd dropped a bid to buy its assets. The National Stock Exchange’s Nifty Index fell 1.27% to 16,953.95, while the BSE Sensex lost 1.08% to 56,579.89.
Bond yields rose this month after the Reserve Bank of India said it would turn to fighting inflation. The yield on the benchmark 10-year bond hit a high of 7.28% on April 13 as traders bet on an imminent rise in interest rates by shorting bonds. Last Friday, the 6.67% 2035 bond became the most shorted paper with trades worth ₹12,303 crores on Clearcorp’s repo order matching system.
A short sale involves selling a borrowed security with the intention of buying it later when prices fall. Short selling is an important hedging tool against rising market rates.
However, bets turned sour as crude prices fell nearly 5% this week after the IMF cut its forecast for global economic growth and 10-year US Treasury yields fell the most in three years.
Meanwhile, Indian state governments refrained from borrowing domestically following central transfers in March and a ₹$1 trillion in capital spending support announced in the budget. Only Punjab will increase ₹1,500 crores at an auction this week by issuing State Development Loans (SDLs) this week.
Separately, aggressive corporate buying was also seen in the 5-15 year old logs last week. Traders also began to unwind their short positions, which caused 10-year yields to fall almost 24 basis points from the peak.
“Bond yields went from 6.22% on September 30, 2021 to 7.28% on April 13, 2022 in about six months. A reversal was therefore inevitable. A significant correction in Crude, no SDL auction as per schedule and a US Treasury reversal and huge accumulated short position in the bond market coupled with global risk sentiment, facilitated this drop to 7.04%. in 10 years from the peak of 7.28%,” said Gopal Tripathi, head of treasury at Jana Small Finance Bank.
However, bond markets may remain volatile as investors are worried about the large supply of bonds in the market and aggressive US Fed policy tightening. “, Kotak Mahindra Bank said in a report on Monday.