Bond yields inch up on govt borrowing, liquidity crunch fear

Government bond yields that had remained soft over the last two months have inched up on fears that liquidity crunch could worsen and the government could overshoot its market borrowing target.

The absence of bond purchases by the Reserve Bank of India through open market operations even as repo borrowings have crossed R1 lakh crore again is also adding to worries, traders said.

The yield on the benchmark 10-year sovereign paper that acts as a proxy to pricing of bank loans and other private debt, is just 3 basis points away from its all-time high of 8.26% that it touched in August. Before the current benchmark bond was issued, the 8.79%, 2021, bond was trading at even higher yield of 8.73%. Other most traded bonds have also seen a rise in yields offlate.

Liquidity deficit in the banking system rose sharply with borrowings from the RBI's daily repo auction rising above R1 lakh-crore mark yet again. On Friday, repo borrowings stood at R1.19 lakh crore.

"Liquidity is bad right now and well beyond the 1% comfort level of RBI," said Vivek Mhatre, head of treasury at Union Bank of India.

Another indicator of the overhang of the government borrowing amid tight liquidity are higher cutoff yields awarded at Friday's bond auction. The cutoff yield on the 8.19%, 2020, bond was 8.24% compared with 8.17% in the previous tender. Similarly cutoff yield on the 8.20%, 2025, and 8.83%, 2041, bonds were higher by at least 3 basis points.

Sentiment in bond market could get more bearish if RBI does not announce bond purchases via OMOs. RBI had absorbed 25% of government's borrowing in April-September by buying bonds worth around Rs 80,000 crore.

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