10-year government bond yields hit record high

Mumbai's benchmark government bond yield has surged to a record high, pushing up borrowing costs for corporates as a surge in debt supply pressures and reiteration of inflation risks by the central bank have clouded the view on sovereign debt. On Friday, the yield on the 10 year benchmark government bond reached 7.12%, its highest closing level since April 28. The yield of the 10-year bond was 7.12%, 15 basis points higher than a low of 6.97% reached on May 19 at a low of 7.12%. The yield of the highly liquid four-year bond climbed 13 basis points over the same period. The value of bond prices and yields change inversely. The percentage point of one basis point is 0.01 percent. The cost of corporate bonds is determined by government bond yields, making it more expensive for firms to raise funds through debt. From May 19 to June 30, yields on 3-year, five-year and ten-year corporate bonds in the secondary market have surged 10, 12 and 12 basis points, respectively, bank treasury officials said. Last week the Kerala Infrastructure Investment Fund raised a lower-than-achieved quantum through a state-backed green bond sale as some big institutions shied away after the recent jump in sovereign debt yields, arrangers to the issue said. While the monthly quantum of bonds being sold by the central government in July-September is largely unchanged at 1.36 lakh crore, the market's supply burden is larger as there are no maturities of sovereign bonds lined up until November. There's record supply lined up in this quarter and unless there is a worldwide shift towards softer monetary policy, which seems unlikely at the moment, I don't see much room for a rally in bonds, said Naveen Singh, ICICI's head of trading. The trading community is still reasonably healthy activity from state-owned banks in the market, but I don't see the trading community comfortably absorbing supply until there is visibility on a fall in yields, he said. Singh expects the yield of the 10 year bond to be in a band of 7.05 - 7.20% in the coming weeks. The market received a net reprieve in April-June due to maturity of gilts worth more than 1 lakh crore in April-June. State governments have also issued a much greater amount of bonds in April-June than in the previous year, with the supply of debt rising more than 60,000 crore from their side. In July-September, bonds sales of 2.4 lakh crore have been reported. The higher issuances of State bonds, which enjoy quasi-Sovereign status and bear higher yields than the Centre's bonds, have eaten into demand for the latter from large institutional investors, traders said. In the first quarter of the fiscal year, a key factor that helped the bond market absorb the government's record borrowing programme was optimism on softer monetary policy after the RBI unexpectedly paused rate hikes in April. In the following policy meeting in June, while keeping rates unchanged, the Central Bank did not shift away from its position of withdrawing of accommodation and emphasised the need to bring inflation down to its 4% target. If the RBI is currently forecasting inflation at 5 percent in fiscal 2024, the possibility of rate cuts appears distant, while itsretaining of the stance suggests that it will continue draining out excess liquidity.