Bonds, bank stocks rally in relief after Centre plans lower borrowing next fiscal
‘Lesser likelihood of treasury losses for banks; upward pressure on rates to ease’
Bond prices rose sharply on Tuesday, resulting in a drop in yields, after the government announced a reduced borrowing plan for the first half of the financial year 2018-19, providing major relief to banks that were staring at mark-to-market losses on their bonds portfolio.
The yield on the 10-year benchmark bonds fell 29 basis points to 7.33% - its biggest one-day fall in just more than four years - after the government said on Monday it would borrow only ₹2.88 lakh crore in the first half of 2018-19. [100 basis points = 1 percentage point]
This amounts to 47.5% of its gross market borrowing, and would clock in lower than the market expectation of 60%. The government also said it would borrow ₹50,000 crore less in the next fiscal and added it would distribute borrowings across maturities.
Earlier, bond issuances were concentrated in the 10-14 year tenure.
The 10-year bond yield had touched a high of 7.78% earlier this month, worrying banks that were staring at mark-to-market losses, as a result.
‘Twofold impact’
“The cooling off in the G-sec yields is likely to have a twofold impact [on] banks,” Karthik Srinivasan, group head, Financial Sector Ratings, ICRA said in a statement.
“First, the likelihood of treasury losses during Q4FY2018 has significantly reduced and second, the expectations of upward pressure in deposit and hence lending rates will now ease to some extent”, he added.
Falling yields also lifted the sentiment in equity markets as banking stocks gained. The BSE Bankex rose 0.93% while the 30-share BSE Sensex closed 107.98 points, or 0.33%, higher.
Bond prices rose sharply on Tuesday, resulting in a drop in yields, after the government announced a reduced borrowing plan for the first half of the financial year 2018-19, providing major relief to banks that were staring at mark-to-market losses on their bonds portfolio.
The yield on the 10-year benchmark bonds fell 29 basis points to 7.33% - its biggest one-day fall in just more than four years - after the government said on Monday it would borrow only ₹2.88 lakh crore in the first half of 2018-19. [100 basis points = 1 percentage point]
This amounts to 47.5% of its gross market borrowing, and would clock in lower than the market expectation of 60%. The government also said it would borrow ₹50,000 crore less in the next fiscal and added it would distribute borrowings across maturities.
Earlier, bond issuances were concentrated in the 10-14 year tenure.
The 10-year bond yield had touched a high of 7.78% earlier this month, worrying banks that were staring at mark-to-market losses, as a result.
‘Twofold impact’
“The cooling off in the G-sec yields is likely to have a twofold impact [on] banks,” Karthik Srinivasan, group head, Financial Sector Ratings, ICRA said in a statement.
“First, the likelihood of treasury losses during Q4FY2018 has significantly reduced and second, the expectations of upward pressure in deposit and hence lending rates will now ease to some extent”, he added.
Falling yields also lifted the sentiment in equity markets as banking stocks gained. The BSE Bankex rose 0.93% while the 30-share BSE Sensex closed 107.98 points, or 0.33%, higher.