Yields fell as much as 12 basis points to 6.94%, the lowest level in about two week, but erased the advance to end at 7.05%, a tad lower than its previous day close. A basis point is 0.01 percentage point.
“Rating upgrade will certainly be a key positive for investors over a period of time,” said Jayesh Mehta, MD and Country Treasurer at Bank of America. “The benchmark yields showed strength initially. But, the demand-supply dynamics remains the same as FPI limits are nearly full. Banks too are cautious to take fresh gilts position due to their recent mark-to-market losses with a surging benchmark yield. ”
The upgrade came as a big relief for the bond markets which has been witnessing a sell off pushing the yields to a 14-month high amid fears that the government may breach the fiscal deficit target of 3.2 percent of the Gross Domestic Product for the year.
Foreign portfolio investors have nearly exhausted the investment limit in sovereign bonds which is at Rs 1.87 lakh crore. Fresh limits are released through RBI auction.
Investors in bonds have also been selling short for the past few weeks as they expected the supply from the government to accelerate as the revenue collections is faltering due to the Goods and Services Tax hiccups. Covering the short positions also helped the early rally in bonds.
“Overnight short-positions triggered sharp fall in bond yields,” said Naveen Singh, senior vice-president at ICICI Securities Primary Dealers. “The rating upgrade is just a sentimental boost, which was also reflected in RBI’s auction Friday. But it doesn’t change ground reality that inflation has bottomed out and fiscal worries are still looming. Yield may continue to inch higher as demand supply still unfavourable.”
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