By Manish M Suvarna
The typical yields on 10-year state development loans (SDL) fell to a nine-week low on August 31, following yields on government securities (G-Sec) moderated. Lower borrowing by states against what was indicated in the calendar also helped yields on SDLs turn out to be reduce. On a weekly basis, the typical 10-year borrowing expense on SDL has moderated by 7 basis points to 6.90%.
“Markets have been buoyant post comments from Fed Chair Jerome Powell at the Jackson Hole symposium. Yields on SDLs have softened as they continue to provide attractive spreads, especially on the 10-year curve, as against PSU bonds,” stated Anand Nevatia, fund manager, Trust Mutual Fund.
Since last week, yields on benchmark government securities cooled off due to a dovish speech by Powell, enhanced demand for securities at the weekly bond auction on August 27 and absence of devolvement in previous handful of auctions.
The 10-year benchmark bond 6.10%-2031 yields eased nearly 6 basis points considering the fact that last week and closed at 6.199% on Wednesday, as against 6.2539% on August 27.
Meanwhile, reductions in US Treasury yields have also boosted the appetite of traders. Traders who had been on the sidelines became active due to positive cues. Lower US Treasury yields ordinarily prompt investors to move to emerging markets in search of larger yields on debt securities. In the last one week, the yields on 10-year US Treasury notes have moderated nearly 5 basis points.
Traders also got comfort from the comment of the central bank’s governor that they do not want to give any sudden shock or surprises to the markets.
Additionally, the devolvement has stopped in the last handful of weeks due to enhanced demand from investors and superior FPI inflows in August. The marketplace saw the last devolvement on July 30 and the auction was cancelled on August 6. The other auctions had been subscribed completely at nearly marketplace levels.
So far in 2021-22, the total devolvement to key dealers is Rs 76,000 crore, nearly 14% of total borrowings. The highest devolvement so far this year has been in the 5-year G-Sec, followed by a 10-year bond, according to a CARE Ratings report.
FPIs have bought debt securities worth $1.635 billion in August, information on National Securities Depository showed.
Market participants stated reduce borrowing by the states than the indicative calendar also softened yields on SDL in the earlier auction. The borrowing so far in FY22 amongst April 8 and August 31, was 13% reduce than the indicative borrowing calendar for this period. “Lower-than-expected borrowings in the current quarter from states also aided the fall in yields,” Nevatia stated.