Rise in bond yields hints at reversal in interest rates

Savers reeling under a negative real interest can expect some relief as a turn in rate cycle is around the corner, the Business Standard has reported. While savers may benefit from this, borrowers may have to shell out more.

The report said the 10-year bond yield may rise to 6.5% soon and touch even 7% in a year which indicates a turn in the rate cycle. The rise in interest rate will be gradual, the report added, quoting experts.

According to the Business Standard, the Reserve Bank of India wanted the yield remain under 6% for the most part of 2020. In February this year, it allowed it rise slowly for an “orderly evolution of yield curve”.

It further noted that inflation was 6.6% on an average in 2020 and 6.2% in 2020-21, while one-year deposit with SBI yielded about 5%. Quoting bond dealers, the report said the central bank will try to correct negative real interest rate.

The journey would be bumpy

Corporate entities with low ratings will be the worst hit. Better-rated firms will fare better because lenders will compete with one another to extend credit, the report said, that bonds will also get good response from the market. At least for a year, there will be ample liquidity in the system, it added.

The 10-year bond yield closed at 6.36% on Tuesday. According to experts quoted in the Business Standard report, it should rise to 6.50% by the end of December or in January. The RBI would still be comfortble.

Joydeep Sen, consultant, fixed income at Philip Capital is quoted as saying that the market at the cusp of the anticipated rate reversal.

The RBI may take the first steps towards rate normalisation in the next policy review in the first week of December. The bond market is indicating such rate movements much in advance.

The report quoted Rahul Singh, fund manager, fixed income, LIC Mutual Fund, as saying that the 10-year yield is expected to touch 7% per cent in about a year, but the journey would be “bumpy”.

Soumyajit Niyogi, associate director, India Ratings and Research, is quoted as saying that the rise in yields is a reflection of changes in the interest rate environment. The RBI may allow market-based rates to rise slowly, without touching policy rates.