Lower retail inflation reading for September notwithstanding, yields of Government Securities (G-Sec) nudged up as US Treasury yields rose, crude oil prices surged, and the possibility of RBI conducting open market operation (OMO) sale of G-Secs hung like a sword of Damocles on the market. 

“Lower inflation is good news for bonds, but G-Secs are likely to draw direction from the momentum in the US Treasury yields (ticked up post US inflation) and locally, from the timing of the proposed OMO bond sales, as domestic liquidity swings on tax flows, upcoming State elections, government spending, crop payments, and festive currency demand. “Signs of a liquidity hangover will quickly draw in an OMO auction, the first of which is expected to be held within October-November,” said Radhika Rao, Senior Economist & Executive Director, DBS Bank.

The yield of the 10-year benchmark G-Sec (7.18 per cent GS 2033) closed up 2 basis points at 7.32 per cent (previous close at 7.30 per cent), with its price declining 13 paise to close at ₹99.04 (₹99.17).  The yield of the 14-year G-Sec (7.18 per cent GS 2037) closed up about 1 basis point at 7.43 per cent (previous close at 7.42 per cent), with its price declining 12 paise to close at ₹97.81 (₹97.93).

External factors

India’s retail inflation eased to 5.02 per cent in September 2023 against 6.83 per cent in August. “While the RBI may say that the domestic bond yields are majorly determined by domestic factors, our market does react to external factors sometimes. US consumer price index reading is not that great. So, rate action there can be delayed further.

“In addition, in India, in spite of deficit liquidity, the market is wary about OMO sales. Not ready to react. Now at every drop in yields, there are sellers,” said Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap LLP.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that the 10-year yield nudged up as traders would have sold the paper to deploy the proceeds at the weekly Friday G-Sec auction.

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