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How government sets the bond market on fire


MUMBAI: Indian bonds had their best day in about 52 months as investors cheered the governments decision to reduce its first half borrowings programme and thereby reducing pressure on the system.

Some, however, believe that the optimism may be short lived as it just kicked the can down the road.

Yields on benchmark government bond crashed 29 basis points to 7.33% — its biggest single-day fall since November 25, 2013. Bond prices and yields move in opposite directions.

“The bond market mood has changed after the governments definitive schedule for market borrowing,” said Ashutosh Khajuria, executive director at Federal Bank. ”Instruments in the borrowing plan are conducive of bank asset liability management.”

The government in a surprise move on Monday announced it would auction just 48% of its planned annual bond sales in the first six months of the fiscal beginning April 1. Thats less than the 60% to 65% it typically raised during the first six months of the fiscal in the past. The size of the total borrowing from the market was also cut by Rs 50,000 crore.

The government also said that it would sell more short-term bonds with lesser interest rate risks, and inflation linked notes.

This comes as a boon to bond traders who were whipsawed in the previous quarter when the yields jumped nearly 100 basis points inflicting losses on traders and also mark-to-market losses on bond portfolio of banks.

That drove out banks from the market resulting in lower volumes, and also wild movement in yields due to poor liquidity. With the fall in yields, banks can now feel relieved.

“There is no mark-to-market loss in fixed income portfolios now,” said R Sivakumar, head of fixed income at Axis Mutual Fund. “The governments changed mode of financing will be more palatable for the bond buyers now. Investors may choose to add more to their bond portfolios.”

Yields surged to as high as 7.77% in February. In a span of six months ended February, government bond yields surged about 100 basis points.

“With the sharp fall in yields, the bond market may take some breather and may see better participation going forward,” said Naveen Singh, head of government securities trading at ICICI Securities Primary Dealership.

But skeptics say that comfort could be short lived since the government has neither reduced its total borrowing programme, nor changed its fiscal deficit target. Instead, it would end up borrowing more in the second half. The other non-market borrowing would come from small savings which anyway is also depriving the private sector of resources.

“We are skeptical that the tinkering of the borrowing schedule — kicking the can down the road — would have a lasting impact on bonds,” said DBS Holdings analysts Radhika Rao and Eugene Leow.

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