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Bond yields at pre-Covid high, beat mortgage rates

MUMBAI: Bonds fell to a pre-pandemic low on Monday even as the sensex jumped more than 1% to close up 651 points and the rupee gained 27 paise. The government’s cost of borrowing, as evidenced by the yield on 10-year bonds, exceeded mortgage rates offered by most banks to a two-year high of 6.59%. While Union Bank of India loans start at 6.4%, Bank of Baroda offers them at 6.5%.
Bond prices have an inverse relationship with yields, so one goes down even as the other goes up. On the equities side, markets opened strongly, following Asian equities and closing higher on expectations of a growth-friendly budget. The Nifty also rose 18,000 to close 1.1% higher at 18,003. However, analysts expect volatility as the Omicron variant continues to spread rapidly.

The rupiah rallied to a two-month high, supported by capital inflows. The national currency closed strong at 74.04, up from Friday’s close of 74.31 against the dollar – the highest since Nov. 9. A record fundraising by Reliance Industries and other capital inflows should keep the dollar in check.
Bond markets, however, saw a massive sell-off. The 10-year bond’s 6.59% yield is the highest since Jan. 31, 2020. The benchmark 10-year bond had closed at 6.54% on Friday. Sentiment in the bond market changed after the RBI became a net seller of bonds – a move aimed at supporting moves to normalize the excess liquidity injected to help markets during the pandemic. Bond yields rose ahead of December inflation figures, which are due on Wednesday.
Dealers also have a negative view on inflation, with global oil prices firming on concerns over supply constraints due to geopolitical tensions in Libya and Kazakhstan. Additionally, bond yields rose due to a surge in US yields. Lower unemployment in the United States should prompt the Federal Reserve to raise rates sooner than expected.
Domestically, the sensex opened sharply higher at 60,070 and hit a high of 60,427 in intraday trading. Bank stocks were among the main gainers. During the day, rumors circulated that the government could raise the limit on foreign investment in public sector banks to 74%. Among lenders, SBI gained the most (2.5%) anticipating better results in Q3. HDFC (2.4%), Kotak Bank (2.3%), ICICI Bank (2.2%) and Axis Bank (1.7%) were the other big winners.
However, the winning rupee also wreaked havoc on some stocks. Wipro fell 2.5% and was the biggest loser among sensex stocks. The other losers in the index are Nestlé India (-1.1%) and Asian Paints (0.6%). Sun Pharma, Dr Reddy’s and IndusInd Bank also closed in the red.


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