Weak Demand Sparks Surge in Treasury Bill Yields to One-Year Highs
Weak demand pushes Treasury bill yields to a one-year high. ICICI Bank predicts 10-year bond yields to stay between 7.30-7.45%.
Investor appetite for government securities has cooled significantly, pushing Treasury bill yields to their highest levels in over a year. According to a recent research report by ICICI Bank, this surge is a direct result of weak demand during recent auctions, signaling a shift in the domestic bond market's current dynamics.
The Numbers: A Sharp Climb Across Tenors
The report highlights a notable increase in cut-off yields across all durations of Treasury bills, with figures exceeding initial market estimates. The breakdown of the rise is as follows:
- 91-day Treasury bills: Yields climbed to 5.93 per cent, up from the previous 5.73 per cent.
- 182-day Treasury bills: Yields rose to 6.55 per cent, compared to 6.29 per cent in the prior auction.
- 364-day Treasury bills: Yields increased to 6.69 per cent from 6.49 per cent.
This trend of rising yields was further evidenced by a bid-to-cover ratio of 1.74 across the three tenors, confirming that demand remained subdued even as mutual funds and banks attempted to acquire some securities.
Benchmark Bonds and Market Trends
The domestic bond yield curve experienced a "steepening bias" last week. While yields at the longer end of the curve edged lower, short-term yields were pushed higher due to the combination of tight liquidity and the poor response to Treasury bill auctions.
Looking ahead, ICICI Bank anticipates that the 10-year benchmark government bond yield will fluctuate within a range of 7.30 per cent to 7.45 per cent in the near term.
Government Securities Auction Details
In a separate government securities auction, the Centre successfully raised Rs 33,000 crore. However, the interest levels varied significantly depending on the maturity period:
- Strong Demand: Seven-year and 30-year bonds saw relatively better interest.
- Weak Demand: The three-year segment struggled to attract investors.
The overall bid-to-cover ratio for this auction stood at 2.4, which is notably lower than the long-term average of 2.8.
State Borrowing and Liquidity Outlook
The market is also bracing for increased borrowing from state governments, which could keep spreads elevated. Twelve states are slated to borrow a total of Rs 29,900 crore this week, surpassing the scheduled calendar amount of Rs 26,200 crore. ICICI Bank expects the spread between state development loans and government securities to remain high.
On the liquidity front, there is a silver lining. As of October 30, the system surplus widened to Rs 1.6 lakh crore (approximately 0.6 per cent of net demand and time liabilities). This was bolstered by government bond maturities and increased government spending. The report suggests that liquidity should remain comfortable, especially with the expected reversal of a 30-day variable rate reverse repo operation.
Global Factors to Watch
While domestic factors are critical, ICICI Bank emphasized that global events will continue to steer market sentiment. Investors are keeping a close eye on:
- The US midterm elections.
- US labour market data, specifically unemployment figures and payrolls.