The yield on the 10-year benchmark bond ended higher on Monday, as the sentiment dampened on reports that the Union government may borrow more funds in the second half of the financial year to compensate states for GST, and concerns over August CPI inflation, dealers said. The 6.10%-2031 bond yield ended at 6.1920%, against 6.1782% on the previous trading session.
Additionally, an uptick in US Treasury yields on Friday and crude oil prices pushed yields up further. “Yields went up today (Monday) as there were concerns over inflation numbers and since the markets had run up too much last week, there was little profit booking by traders,” said Mahendra Kumar Jajoo, chief investment officer, fixed income, Mirae Asset Investment Managers (India).
Govt data released after market hours showed that subdued prices of food items like vegetables pulled down the retail inflation for the third month in a row to 5.3% in August, within the RBI’s comfort zone.
News agency Newsrise, quoting officials, reported that the government plans to borrow Rs 84,000 crore from October to March to fund GST compensation to states. This additional borrowing will be a part of the government’s plan to borrow Rs 1.59 lakh crore.
Market participants expected the CPI inflation to remain broadly unchanged in August, as food prices are expected to ease. “We expect CPI inflation to remain broadly unchanged at 5.66% in August from 5.59% in July. Food inflation is expected to increase marginally by 5 basis points to 4.01% as against 3.96% in July, led by a 0.8% month-on-month pick-up in the index, against a 1% pick up in July. Core inflation is expected to remain flat from June at 5.9%,” a Kotak Mahindra Bank report said.
On Friday, yields on US Treasury notes rose sharply as the producer price index rose 0.7% in August. The producer price index measures the average changes in prices received by domestic producers. It is an indicator used by the Federal Reserve to make any changes to its policy. The 10-year US Treasury yields rose to 1.339%.
Prices of Brent crude oil rose more than 1% on Monday on concerns over US supplies after damage caused due to Hurricane Ida. By the end of market hours, Brent crude was trading at $73.28 a barrel, up 36 cents or 0.49% for the November maturity.
Dealers with a state-owned bank said yields are expected to remain flattish up on Tuesday. However, further increase in oil prices will put pressure on yields.
“We expect the 10-year paper to remain in the 6.15-6.25% range in near term,” said Upasna Bhardwaj, senior vice president, Kotak Mahindra Bank.