MUMBAI: Bonds slumped to their pre-pandemic low on Monday even as the Sensex rose more than 1% to close up 651 points and the rupee gained 27 pounds. The government’s borrowing cost, as reflected in the yield on 10-year bonds, has soared more than housing loan rates offered by most banks to a two-year high of 6.59%. While Bank of Baroda loans start at 6.4%, Bank of Baroda lends it at 6.5%.
Bond prices have an inverse relationship to yield, so one goes down even as the other goes up. In stocks, markets opened strongly, tracking Asian stocks and closed higher on expectations of a pro-growth budget. Nifty also rose to 18,000 to close 1.1% higher at 18,003. However, analysts expect volatility as the Omicron variant continues to spread rapidly.
The rupee rose to its highest level in two months, boosted by inflows. The local currency closed stronger at 74.04, up from Friday’s close of 74.31 per dollar – the highest level since November 9.
Other capital inflows are expected to keep the dollar in check.
But the bond markets saw a sell-off. The 6.59% yield on the 10-year note is the highest since January 31, 2020. The benchmark 10-year note closed at 6.54% on Friday. Sentiment in the bond market has shifted after the Reserve Bank of India became a net seller of bonds – a move seen aimed at underpinning measures to normalize the excess liquidity being injected to help markets during the pandemic. Bond yields rose ahead of December inflation figures expected on Wednesday.
Traders also have negative inflation expectations with global oil prices rising due to concerns about supply constraints due to geopolitical tension in Libya and Kazakhstan. In addition, bond yields rose due to higher US yields. The drop in the US unemployment rate is expected to prompt the Federal Reserve to raise interest rates earlier than expected.
In the domestic market, Sensex opened stronger. Banking stocks were among the main gainers. Rumors circulated during the day that the government might raise the limit on foreign investment in public sector banks to 74%. The SBI had the largest share (2.5%) with better results expected for the third quarter. HDFC (2.4%), Kotak Bank (2.3%), ICICI Bank (2.2%) and Axis Bank (1.7%) were other top gainers.