The current fiscal 2021 is an interesting year with the two halves depicting opposite narratives. The first half of the fiscal year witnessed bond yields below 6 per cent driven by effective yield management by the Reserve Bank of India (RBI). However, this changed post budget when the government announced to upped its borrowing programme for the current fiscal year.

With only a month left for the fiscal year to get over, the market is still expecting a consolidated borrowing amount of over Rs 2.5 lakh crore as per the auction calendar of Centre & States.

As per the State Bank of India (SBI) report, the average increase in government securities (G-Sec) yields across three, five & ten years is around 31 basis points (bps) since the budget. Further the AAA Corporate bond and state development loan (SDL) spreads have increased by 25-41 basis points during this period.

While this significant increase in bond spreads is a manifestation of the nervousness of market players, this development can also lead the central bank to resort towards unconventional tools to control the surge in bond market yields, the report points out.

“This is important as any further upward movement in G-sec yields even by 10 bps from the current levels could usher in Mark-To-Market (MTM) losses for banks that could be a minor blip of a rather wise exceptional year in 2020-21 bond markets with the RBI assiduously supporting debt management of Government at lowest possible cost in 16 years, that otherwise could have threatened financial stability,” says Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

One of the reasons as stated in the report points out that the recent surge in yields is due to short selling by the market players. “While going short or long are typical market activities that aid in price discovery, but in times it can result in price distortions too as it might be happening now,” says Ghosh.