The bond market is staring at a massive government borrowing program
Bombay : Finance Minister Nirmala Seetharaman’s budget rattled the bond market with a higher than expected government borrowing plan and a fiscal deficit target for the next fiscal year. It also took banks by surprise, as they are now eyeing a loss in value relative to the market due to rising yields.
The government has indicated that it plans to borrow as much as ₹14.95 trillion from the debt market, according to the budget document, higher than forecast ₹12.5-13 trillion. Net debt after repayments is estimated at ₹11.59 trillion. In addition, net state borrowing was set at 3.5% of GSDP, which adds to the total number of borrowings.
Following the news, the yield on 10-year government securities hit a 2-year high of 6.89% during trading before closing at 6.84% on Tuesday.
The sell-off in the bond market was further accentuated by the omission of details regarding the inclusion of sovereign bonds in global indices. The revenue secretary, however, clarified at the post-budget press conference that the government is currently in discussion about the right to tax capital gains on such transactions.
Bond brokers say government borrowing is higher than even during the pandemic period, leading to a huge mismatch between supply and demand. The market therefore expects the 10-year yield to approach 7-7.25% in the coming months.
“Higher than expected budget deficit and gross borrowing at nearly Rs. 15.0 trillion, with no update on measures to facilitate expected bond index inclusion, pushed the 10-year G-sec yield past 6.88% intraday, negating the benign impact of change/conversion announced yesterday. Large dated borrowing coupled with impending repo rate hikes may push the 10-year yield to 7.0% over the next quarter, setting the stage for an upward shift across the yield curve.” , said Aditi, Nayyar, Chief Economist, ICRA
According to Dhawal Dalal, Director of Fixed Income Investments, Edelweiss Mutal Fund, “Given central and state borrowing needs in FY23 as well as corporate borrowing, total gross borrowing is expected to to be close to ₹30 trillion. This comes at a time when global bond yields are tightening. It will be a daunting task for market participants to sustain such large borrowing without affecting yields.”
That said, the market is awaiting clarification on the inclusion of sovereign green bonds in the borrowing program. Bond market players are of the view that if foreign investment is allowed in these bonds, the amount of borrowing that domestic players will have to bear will decrease.
The announcement of the loan came as a thunderclap even for the banks, which had bought the new 10-year with a coupon of 6.54% in January. The yield on this paper is currently hovering around 6.82%.
“If yields continue to rise, banks will have to make provisions against MTM losses before March 31. This will be a huge burden for banks,” said the head of treasury at a public sector bank.
With greater clarity on next year’s government borrowing program, the bond market now expects the Reserve Bank of India to announce some policy measures at the upcoming monetary policy meeting. Dealers expect the central bank to do a Twist trade, which is the simultaneous buying and selling of bonds to help manage yield. A possible rise in the reverse repo rate is also not ruled out to support an expansionary budget.
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