Traders were panic-stricken after the Central Bank signaled that rising yields are to remain here by offering surprisingly high borrowing costs at a debt sale. High-yield bonds are those bonds which pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to revert, so they must pay a higher yield than investment-grade bonds to compensate investors.
On 21st August 2020, the Reserve Bank of India sold a 30-year bond at a cutoff yield of 6.7596%, versus the 6.65% estimated in a Bloomberg survey. The central bank, which acts on account of the government for debt sales, sold another security at a higher yield to raise 20 billion rupees ($267 million) which is more than what was planned.
Arvind Chari, Head of Fixed Income at Quantum Advisors Pvt said that The RBI’s and bond market’s views of higher yields may differ. If the central bank doesn’t provide support in the form of purchases in the next two to three weeks, it may be lead to higher yields.
The debt sale followed the publication of the latest RBI minutes, which presented that its rate-setting panel has turned less pacifistic with higher inflation. Nowadays, traders are bracing for a further steepening of the yield curve, while holding out hope that the central bank will introduce other measures to relieve pressure on the bond market.
The cost of borrowing has already been increasing, with the new benchmark 10-year bond yield jumping more than 30 basis points in the past three weeks. The RBI’s debt purchases in the market have changed in recent weeks. The central bank may be planning to stay away to make sovereign debt more attractive to investors in the middle of falling real rates.
Suyash Choudhary, head of fixed income at IDFC Asset Management in Mumbai said that the market will expect that Friday’s auction results have conclusively met the threshold for the RBI to signal something. He concluded by saying that it is clear that the market’s auto mechanism is broken currently, and a light touch approach won’t work from now on.
