Bond yields rise as crude prices inch higher

Bond yields rose 1-3 basis points on Wednesday as oil prices gained. The sell-off in bonds took place as primary dealers had to lighten their positions ahead of the weekly bond auction on Friday. Dealers said traders had cut their long positions ahead of the release of the outcome of Federal Reserve’s meeting.

The yield on new 10-year benchmark 6.10%-2031 bond ended at 6.1879%, which is almost 1 basis point higher than its previous close. Yields on most traded bonds 5.63%-2026 and 6.64%-2035 ended at 5.7062% and 6.8031%, respectively.

“The rise in bond yields is not just over one factor, but a combination of all. The market is focusing on guidance by the RBI in the policy and what will happen at the next auction after heavy devolvement in the previous auction on PDs,” said Lakshmi Iyer, CIO-fixed income and head-products at Kotak Mahindra Asset Management Company.

The yields on most traded bonds, 5.63%-2026 and 6.64%-2035, have risen on supply concerns. Dealers are of the view that traders have taken positions ahead of the weekly bond auction on Friday. The Reserve Bank of India (RBI) on Monday announced weekly bond auction worth Rs 32,000 crore, of which Rs 11,000-crore sale will be of 5.63%-2026 and Rs 10,000 crore of 6.64%-2035 bonds. Similarly, the RBI will sell bonds worth Rs 4,000 crore and Rs 7,000 crore in the segment of GoI FRB 2033 and 6.67%-2050, respectively.

Brent crude oil prices were trading higher and breached $75 a barrel mark after the reports on tightening supply of US crude. Crude oil prices also rose due to delays in US-Iran nuclear talks. By the closing time of the Indian markets, the Brent crude oil was trading at just above $75 a barrel, which is up almost $1 from morning trade.

Traders also await the outcome of the Federal Reserve meeting as it is expected that the Fed will taper its large asset purchases programme due to rising Covid-19 delta variant infections. The Fed buys $120 billion in government-backed bonds each month – $80 billion in treasury debt and $40 billion in mortgage-backed securities.

But, some dealers with state-owned banks said the Federal Open Market Committee meeting is not a concern for the markets right now, and that domestic factors are playing an important role. “Right now, domestic factors are more significant than global factors as FOMC is largely known by the market,” Iyer said.