Why 10-year G-sec yields are still holding up
Moneylife Digital Team 29 October 2015
Sustained selling pressure from banks and corporates and net supply are the reasons as to why G-sec yields are not coming down despite a 50 bps rate cut, says a State Bank report
Even after the 50 basis points (bps) cut in repo rate by the Reserve Bank of India (RBI) last month, the 10-year G-sec yield is still adamant at 7.60% primarily on sustained selling pressure from banks and corporates. However, going forward, the yields will gradually soften says State Bank of India (SBI) in its Ecowrap report.
It said, "This (yields still at 7.60%) is perplexing, as trends suggest that the spread between repo rate and 10-year yield has been at around 50 bps in the last couple of months on an average. Hence by this logic, 10-year yield should drop to 7.25%, or at least should have breached 7.5%." 
Net supply is one of the reasons why G-sec yields are not coming down, the Ecowrap report says, adding, "In October 2015, there is a net supply of Rs75,000 crore of Government securities, highest among the second half. Even after adjusting for redemptions and investments from foreign institutional investor (FII) during October, the net supply will still be around at Rs4,000 crore. This net supply is one of the reasons why G-sec yields are not coming down."
According to the Government borrowing calendar, it will raise only Rs2.34 lakh crore through market borrowings, excluding Rs15,000 crore via sovereign gold bonds, in the second half of current fiscal year. The Government, as per the Budget 2015-16, plans to borrow a total of Rs6.01 lakh crore from the market this fiscal. It had borrowed about Rs3.5 lakh crore during the first half of FY2016, which is over 50% of the annual target.
"We however believe that going forward, the yields will gradually soften on many accounts. Firstly, the G-sec auctions till March will now be at an interval of every fortnight, instead of customary weekly auctions. Secondly, CPI inflation will breach the RBI’s target at least by 50 bps on January 2016. Thirdly, the ECB quantitative easing with US Fed uncertainty on rate hike will impact G-sec yields on lower side. Consequently, we expect that 10-year G-sec yield would be around 7.25-7.30% (old) and 7.10-7.15% (new) by March 2016. And fourthly, cumulative net buying position by market players indicates further softening of yields," the report added.
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