The benchmark 10-year government bond yield, a proxy to price all credit in the market, has risen 25 basis points in the last three trading sessions. A basis point is 0.01%.

Yes, there was a rally that lasted just a week.

Yes, yields had dropped.

And yes, it is all a dream now.

Exactly a fortnight ago, the narrative was entirely different, one of yields falling rapidly and the party just getting started on bond street. The government had truncated its market borrowing plan, the regulator had allowed bond losses to be spread over four quarters and monetary policy said it does not see inflation rising but falling. 

Ergo, the view was that interest rates won’t rise as fast as feared. No one can be blamed for thinking that interest rates could go down one last time before they began climbing.

But the bond euphoria has been snuffed out and several banks have increased their benchmark lending rates. Housing Development Finance Corp. Ltd, the mortgage king, hiked its lending rate this week, making home loans expensive. 

Corporate bond yields have shed the rally quicker than government bonds. The rally was so brief that borrowers from the bond market couldn’t take the benefit from it. Non-banking financial companies and even others are bracing for higher cost of borrowings. 

Corporate bond yields in the five-year and 10-year tenor for top-rated borrowers had slipped by 30 basis points last week and have climbed 15 basis points since then. 

Why was the government bond rally short-lived?

For once, public sector banks turned savvy and slid out with whatever losses they could cut during the brief rally. These lenders were net sellers during last week.

Essentially, the bedrock of demand for bonds hasn’t returned. All those hopefuls who bought bonds thinking that public sector banks will continue to grab more are now left holding them. 

With the biggest buyers not interested, the rise in global crude oil prices now looks more threatening. The oil price rise is a threat to the Reserve Bank of India’s inflation forecast and therefore to interest rates.

Another bugbear is the surge in borrowings by states. States are slated to borrow up to Rs1.28 trillion from the bond market in the current quarter, nearly double what they did in the corresponding period last year.

Last but not the least, the general rise in yields across the globe has also added to the bearish sentiment.

Public sector banks don’t seem in a hurry to return to the market, especially when they hold bonds in excess of the mandated 19.5% of deposits.

Hence the swift climb in yields over the past three days.

Since all private credit is priced off sovereign yields, the pressure on loan rates and corporate bonds is palpable.

With credit growth poised to quicken, banks would be willing to raise lending rates to earn more income.

Indebted and overleveraged companies hoping for a breather would be disappointed.

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