Mata Securities India Pvt Ltd | SEBI Registered Research Analyst | Reg. No. INH000022668 | SEBI Registered MF Distributor | ARN-0158
The 10-year G-sec yield rose 24 bps to 7.19% on OMO sales, the US rate hike and Brent above $100
September extended the duration split, and the damage moved further along the curve. Overnight, Liquid, Money Market and Ultra-Short categories again delivered steady annualised returns through the month. Every long-duration category posted negative one-month and fortnightly numbers, and by a wider margin than in August: Gilt, Long duration, Medium-to-Long and Dynamic bond. Unlike August, the losses were heaviest in the first half of the month, when the RBI announced its first OMO bond sales in nearly five years and the US Federal Reserve raised rates. The damage also reached into the 3–5 year segment, so medium duration and corporate bond funds were negative over the fortnight.
The ten-year G-sec yield rose through September in three stages, and each rise came from outside the domestic money market. In the first ten days it held below 7%, even with Brent above $100 and the US 10-year close to 5%, because the record banking surplus kept demand for bonds strong. It broke above 7% in mid-month after the Governor signalled bond sales to drain the FCNR(B) liquidity, followed by the first OMO sales in nearly five years and the US rate hike. There was a brief pause around 22 September, when Brent eased on hopes of a US–Iran settlement and demand at the OMO auctions improved. In the final week it rose again as US yields climbed to their highest since 2007, Brent rebounded and markets priced an October rate hike. It closed the month at its highest level since May. The ten-year rose by less than half as much as the US 10-year, which shows the surplus still cushioned Indian bonds. That cushion is now shrinking as the RBI drains liquidity, and the yield rose further after the 7 October hike and the shift in stance to “calibrated tightening”.
Corporate bond yields rose in September, but by less than G-sec yields of the same maturity, so spreads narrowed. For most of the first half of the month, three- and five-year AAA yields held steady or eased, even as gilts sold off. Banks were holding large FCNR(B) inflows and had less need to raise money through bonds, so fresh corporate supply was limited. The RBI’s OMO sales, meanwhile, added to government bond supply. In the last week, AAA yields caught up as markets priced the October rate hike and quarter-end funding needs pushed issuers back to the market. Over the month, the three-year AAA spread over G-secs narrowed from about 154 bps to 148 bps, and the five-year spread from about 132 bps to 125 bps. AA and A-rated spreads narrowed by similar amounts. This reverses August, when spreads widened.
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