Bond yields remain steady ahead of RBI policy
Bond yields ended steady, a day ahead of the central bank’s mid-quarter policy review, with the market pricing in a quarter point hike in key lending and borrowing rates.
Most economists expect RBI to raise its key policy rates by 25 basis points each in the review, but they have trimmed expectations for subsequent rate hikes.
The yield on the 10-year benchmark bond ended steady at 7.95% after trading in a range of 7.91-7.96% in intra-day trade. Volumes were heavy at `8,060 crore ($1.7 billion) on the central bank’s trading platform. “A 25 basis points hike in both the rates will happen.
The IIP number has been very powerful and we can’t ignore it,” said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai. “We may be coming to the end of the rate hike cycle but if non-food credit growth remains buoyant on the demand side then there could be a policy action,” he added.
The one-year swap rate ended up 3 basis points at 6.20% while the five-year swap rate was up 4 basis points at 6.99%. The spread between the 1 and 5 year OIS rates remained almost steady at around 79 basis points compared with Tuesday’s close. Dealers said they expect the spread between the 1 & 5 year OIS rates to narrow with the longer end of the curve falling faster than the shorter-end, “bull-flattening” the OIS curve if RBI indicates that the rate hike cycle may end sooner than expected.
Dealers said the one and five year OIS spread could narrow to about 75 basis points from the current levels. Traders said OIS rates ended up on the day as traders positioned themselves for a rate hike on Thursday and also as US yields rose in European trade.
Advance tax payments by companies which is expected to drain about Rs 60,000 crore from the banking system kept an upward pressure on short-term rates.
US Treasury debt prices slipped in Europe on Wednesday as demand for safe-haven assets waned after Japanese stocks rallied on the back of the Bank of Japan move to weaken the yen.