Bonds rally

Bond yields have come down despite the pick-up in inflation in recent months. Are traders now expecting inflation to come down thanks to a good monsoon?


Photo: AP
Photo: AP

A lot of attention has been lavished on the equities rally over the past few weeks. Some of it needs to shift to the parallel bonds rally.

The new 10-year benchmark bond was sold by the Reserve Bank of India on Friday. It was priced at a cut-off yield of 6.97%, the first time since 2009 that interest rates on sovereign paper of that maturity have dropped below the 7% mark. Bond yields have come down despite the pick-up in inflation in recent months. Are bond traders now expecting inflation to come down thanks to a good monsoon? Also, at least part of the drop in yields—and the rise in bond prices—should be explained by the conscious efforts of the Indian central bank to increase liquidity in the domestic money market.

Rate cuts have been transmitted better in the bond market rather than by the banks. What needs to be seen is the extent to which the rise in bond prices helps lenders bolster their weakened balance sheets.

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