Government bond yields jump to 4-month high: What's the reason?
What's the story
Indian government bonds fell sharply today, following the Centre's proposed tax overhaul. The move has raised concerns over the fiscal deficit and sent the 10-year yield to a four-month high. Despite officials assuring that the fiscal deficit target is still achievable, traders are worried that this tax reform could widen budget deficits and increase debt supply.
Market response
A look at the figures
The benchmark 10-year bond yield was at 6.5192% as of 10:50am IST, up from Monday's close of 6.4968%. Earlier in the session, it touched a high of 6.5238%, its highest since April 9. On yesterday alone, the yield saw its biggest jump in nearly two years and closed at its highest since March-end.
Fiscal impact
Fiscal deficit target still achievable, say government officials
Prime Minister Narendra Modi recently announced major GST reforms, effective from October, to lower prices of daily essentials and electronics. Despite the plan cutting a major revenue source, government officials maintain that the fiscal deficit target is still achievable. Some strategists and economists also believe there's room for the government to absorb these losses through compensation cess collections, and higher excise duty on oil marketing companies' surplus marketing margins.
Market fears
Traders fear heavy supply could lead to further selling
Traders are worried that the tax-reform plan could widen federal and state budget deficits and lead to higher debt supply, thus dampening demand. An unnamed trader with a state-run bank said, "We cannot rule out further selling from these levels, especially in the benchmark paper, which would see heavy supply on Friday via auction."
Rate increase
Overnight index swap rates surge
India's overnight index swap rates surged in early trading as fiscal concerns weighed on government bonds. The one-year OIS rate rose by two basis points (bps) to 5.56% while the two-year OIS rate jumped almost 4bps to 5.5350%. The liquid five-year OIS rate also saw a rise of 5bps to reach a level of 5.77%.