Benchmark bond yield falls as crude oil prices soften

The yields on the 10-year benchmark 6.10%-2031 bond fell 1 basis point to 6.2214% early this week on improved sentiments, after Brent crude oil prices fell below $70 a barrel in the international market. 

“The fall in yields on the new 10-year benchmark bond is mainly due to easing Brent crude oil prices after China imposed travel curbs following the rising Covid cases in the mainland,” a forex dealer said.

Prices of Brent crude oil have come under pressure, as oil consuming countries in the world have imposed strict measures to curb the spread of coronavirus cases. This comes at a time when the Organization of the Petroleum Exporting Countries (OPEC) and its allies have planned to raise production. Prices of Brent crude were trading at $67.99 a barrel, down $2.71 or 3.83% for the contract maturing in October 2021.

“Easing oil prices in the international market is expected to ease inflation pressure in India, which was seen above the RBI’s upper tolerance band currently,” a treasury dealer with bank said.

Over the last couple of months, inflation has risen due to rising oil and commodities prices. This has forced the RBI to revise its CPI inflation projection to 5.7% for 2021-22 in the monetary policy held on August 6.

Market participants expect the new 10-year benchmark bond to trade between 6.15% and 6.25% in near term as the market is awaiting CPI (retail) inflation this week. “Lower crude oil prices this week tracking the strengthening dollar and concerns on global demand amid increasing infection rates should aid the sentiments slightly this week,” Upasna Bhardwaj, senior vice president, Kotak Mahindra Bank, said in a report.

Meanwhile, the yields on the most traded bonds fell between 2 bps and 4 bps on Monday. The fall in yields on the 5-year bond, which is the most traded bond in the market, was attributed to easing oil prices and its presence in the Government Securities Acquisition Programme 2.0 (G-SAP) auction to be held on August 12.

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