G-Sec yields shift upwards across maturities after Central Bank lifted controls on bills

The yield curve, which plots the yields for government securities (G-Secs) at their each maturity, moved upwards last week, specially at the shorter end of the curve, after the Central Bank removed a price ceiling in place for months on treasury bills, in a signal the market should be bracing for higher market interest rates. 

No sooner the new Governor took office, the Central Bank a fortnight ago removed a guidance rate on treasury bills and at the first primary auctions held on September 22, the yields at three, six and  12-month bills rose by between 30 to 38 basis points, with the yield of the mostly watched 12-month bill jumping to 6.50 percent. However, only 51 percent of the Rs.39.5 billion offered bills at the auction were accepted with the bulk or 99 percent being accepted from the three-month maturity, at a weighted average yield of 6.38 percent. 

The lifting of the yield ceiling was treated as a welcome move by the primary dealers, as it for months had made the auctions for both bills and bonds largely dysfunctional and was cheered by other economists and analysts as a move in the right direction to limit liquidity injections made at the ceiling rate, which acted as a de facto policy rate, which was considered as the root cause for the current foreign exchange shortages and inflationary pressures.
This surge in G-Sec yields also sent the signals to the rest of the market that the broader market lending and deposit rates are going to follow suit. Other analysts forecast more rate hikes could be on the cards.  

“During the week, the secondary bond market yield curve witnessed a surge across the board, amidst the continuous pressure stemming from the yields quoted by market participants,” said First Capital Research (FCR) in a note last week.  

However, the volumes remained negligible as majority of the market participants opted to be on the sidelines, FCR added.

While the overnight money market was in shortage by around Rs.200 billion by the end of last week, about the same level since the Central Bank cut the banks’ statutory reserves ratio on September 1, its holdings of government securities rose to Rs.1,332.21 billion, from Rs.1,215.10 billion at the end of August, up by about Rs.117 billion.  

Some sections argue that increasing the Central Bank holdings undermines the true effect of the SRR hike, as it injects liquidity back into the economy by way of printed money, which further drains foreign exchange outflows and thereby worsening the economic conditions. 

The rupee broadly held steady against the dollar, maintaining its value at Rs.199.6 levels last week, FCR said.