Tag: G-Sec yields

G-Sec prices a tad lower

Banking & Finance

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Government Security (G-Sec) prices came down a tad on Wednesday due to profit booking after the previous day’s smart rally. Price of the 10-year benchmark G-Sec (carrying a coupon rate of 5.85 per cent) ended about 6 paise down at ₹97.81 over the previous close, with its yield edging up about a basis point to 6.1521 per cent.

The price of the aforementioned G-Sec rose about 26 paise (to close at ₹97.8675), with its yield softening about 4 basis points (to close at 6.1440 per cent) on Tuesday as the government cancelled the last weekly G-Sec auction aggregating ₹20,000 crore.

G-Sec yields rose a shade on Wednesday due to profit booking and uncertainty as to how Thursday’s simultaneous purchase and sale of government securities by the RBI under Open Market Operations (OMO) for an aggregate amount of ₹10,000 crore will play out, said Marzban Irani, CIO-Fixed Income, LIC Mutual Fund.

The price of the 15-year G-Sec (carrying a coupon rate of 6,22 per cent) ended about 6 paise down at ₹95.6625 over the previous close, with its yield edging up about a basis point to 6.7027 per cent.

The price of the aforementioned G-Sec jumped about 34 paise (to close at ₹95.725) on Tuesday, with its yield softening about 4 basis points (to close at 6.6955 per cent).

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G-Sec yields may soften temporarily if last two weekly auctions are cancelled: ICRA

Banking & Finance

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Government Security (G-Sec) yields could soften temporarily as the Government of India’s (GoI) fiscal deficit may undershoot FY2021 Revised Estimate (RE) by ₹50,000 crore to ₹90,000 crore, possibly resulting in cancellation of the final two G-Sec auctions, according to credit rating agency ICRA.

ICRA observed that the yield for the 5.85 G-Sec 2030 has risen by more than 35 basis points (bps) since its introduction, to 6.23 per cent intra-day as on March 5, 2021, with an uptick in the recent weeks.

This increase in yields is mainly due to higher-than-expected fiscal deficit and borrowings of GoI for FY2021 and FY2022, a rise in US Treasury yields and hardening crude oil prices.

 

“In our assessment, there could be a modest upside to the GoI’s tax revenues, whereas its non-interest non-subsidy revenue expenditure may trail the Revised Estimate (RE) for FY2021. Therefore, the GoI’s fiscal deficit in FY2021 may end up undershooting the RE of ₹18.5 lakh crore by ₹50,000 crore to ₹90,000 crore,” said ICRA in a study.

Accordingly, the agency projected the fiscal deficit in FY2021 at ₹17.6-18.0 lakh crore or 9-9.2 per cent of GDP (as per ICRA’s nominal GDP forecasts), lower than the 9.5 per cent of GDP included in FY2021 RE.

“Based on this, we assess a lower borrowing requirement of the GoI in the remainder of this fiscal year. However, given the substantial devolvement in Friday’s auction, it remains unclear whether the GoI will choose to cancel the last two weekly auctions of Government of India security (G-sec) with a planned amount of ₹49,000 crore, instead of carrying forward larger cash balances,” ICRA’s economists Aditi Nayar, Yash Panjrath, Aarzoo Pahwa and Tiasha Chakraborty said.

If the final two G-Sec auctions for March 2021 are cancelled, ICRA expects the yield for the benchmark 5.85 GS 2030 may temporarily soften from the current levels (6.2324 per cent) to 6.10-6.15 per cent in the remainder of this month.

Subsequently, the bond yields would take cue from the domestic inflation trajectory, upcoming borrowing calendar of the GoI for H1 (first half) FY2022 and the State governments for Q1 (April-June) FY2022, magnitude of Open Market Operations (OMOs), as well as global factors such as movement in US treasury yields, crude oil prices, and overall risk sentiment.

Yields may remain elevated

Based on the available trends, the agency expects the headline CPI inflation to average around 6.1 per cent in FY2021, before easing to 4.5 per cent in FY2022, while remaining above the mid-point of the Monetary Policy Committee’s (MPC’s) current target range of 2 per cent to 6 per cent. ICRA anticipates that the MPC will leave the repo rate unchanged in 2021.

Given the large supply of dated G-sec and state development loans (SDL) that is expected in FY2022 (aggregate net supply projected at ₹16.0-16.5 lakh crore), yields may remain elevated in the absence of sizeable and frequent market operations.

In ICRA’s view, the benchmark yield may rise during Q1 FY2022, to as much as 6.35 per cent by the end of the quarter.

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G-Sec yields soften on RBI’s ₹20,000-cr OMO plan

Banking & Finance

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Yields on the 10-year benchmark Government Securities (G-Sec) softened about 4 basis points on Monday after the Reserve Bank of India (RBI) announced that it will purchase four G-Secs aggregating ₹20,000 crore, a move aimed at keeping G-Sec yields in check.

However, the OMO effect is likely to be shortlived as the government suddenly announced in the evening that it will be raising up to ₹26,000 crore (notified amount: ₹22,000 crore plus additional subscription option: ₹4,000 crore) by selling two G-Secs (re-issue) via a special auction on Thursday.

This special auction comes ahead of the scheduled auction on Friday to raise ₹26,000 crore via four securities. In this auction, the government reserves the right to exercise a greenshoe option to retain additional subscription up to ₹2,000 crore each against one or more securities.

Special auction

So, while the RBI announced that it will conduct OMO purchases on Wednesday to ensure yields thaw ahead of the scheduled auction on Friday, the government’s sudden move to raise resources via a special auction on Thursday may have thrown a spanner in works of the central bank’s plan to give comfort to the market on yields.

Yields had risen to touch 6.1634 per cent in intraday trading in the G-Sec market last Tuesday on concerns over the fiscal deficit and the government’s borrowing programme. When G-Sec yields in the secondary market go up, the government has to pay higher coupon rate to raise fresh resources. The OMO purchase announcement to tamp down yields needs to be seen in this context.

Following the OMO purchase announcement, the yield on the benchmark 10-year G-Sec, carrying a coupon rate of 5.77 per cent, softened to close at 6.0870 per cent against 6.1283 per cent on Friday.

The price of this security went up 29 paise to close at ₹97.74. Bond yields and prices are inversely related and move in opposite directions.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “OMO of ₹20,000 crore was the reason G-Sec yields declined today. After two G-Secs devolved on primary dealers at last Friday’s auction, yields would have inched upwards.

“The huge borrowing number is putting pressure on bond yields. However, the OMO announcement has capped yields. Additional borrowing on Thursday and the scheduled borrowing on Friday will put pressure on yields.” Irani said the RBI will have to keep coming up with OMOs else the yields will start inching upwards.

Crisil has cautioned that the demand for G-Secs by banks could be affected. Referring to the economic recovery gaining momentum, the credit rating agency said this implies a pick-up in credit growth.

Banks will now have more options than the government to lend to, which could put some pressure on G-Sec yields, said Dharmakirti Joshi, Chief Economist; Dipti Deshpande, Senior Economist; and Pankhuri Tandon, Economist, in the report.

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