Bond yields will rise before falling

Bond markets have nothing to look forward to except fresh supply of government bonds starting April 2013. The RBI has cut repo rate by 25 bps as per market expectations, but has indicated that it has less headroom to cut rates further.

The government has announced a borrowing programme of Rs3.49 lakh crore in April-September 2013 and the RBI has put out the borrowing calendar that shows a weekly borrowing of Rs15,000 crore. The borrowing will be heavily skewed in the 10-14 year maturity bucket with over 40% of the borrowing being done by issuing bonds in this segment.

The market reaction was negative to the RBI’s stance on further rate cuts and yields as the benchmark 10-year bond – the 8.15% 2022 – moved up 5 bps to trade at 7.91% levels.
Traders may take the yields higher as they empty books to absorb the fresh bond supply in the first week of April. The yield will trend over 8% by the March-end from the current levels of 7.91%.

April will see issuance of new benchmark bonds in the 5- and 10-year segments of the government bond yield curve. The market will be light on positions going into the auctions, as it would have sold off whatever position it is holding in the current benchmark bonds.

Bidding for new benchmark bonds will be aggressive and 10-year bond yields will fall in the auctions.

The RBI will have to set targets on inflation, GDP growth, credit, deposit and money supply growth for fiscal 2013-14 and it will find that any growth target will be difficult to achieve with a tight monetary stance.

Investors who have invested in long bond funds on the hope of yields trending down should ride the current volatility in yields as this has more to do with fiscal year end positioning rather than expectations of a higher rate regime.

Parthasarathy is the editor of www.investorsareidiots.com, a website for investors