Mumbai: As the 5-year government bond yield touches 6.50%, treasury heads are looking to step in and start buying as yields have reached a comfortable mark. The 5-year g-sec yield closed at 6.52 on Thursday.
Yields of this bond rose 15-17 basis points to 6.52% on Thursday after the Reserve Bank of India (RBI) decided to prematurely close its FCNR(B) scheme last week, reducing the schemes duration by a month.
"On the announcement of early closure of FCNR(B) , the 5 year paper saw a sharp reversal to 6.50% levels. Now buying could commence from these levels," said A N Vinod, head of treasury, South Indian Bank.
Govt bond yields have risen 15-17 bps after central bank shortened the FCNR(B) scheme’s duration by a month
The 5-year paper had gained the most after the FCNR(B) scheme was announced, as inflows were largely for three- to five-year tenures, with a significant portion of the funds deployed in the 5-year government bond.
On the announcement of the FCNR(B) scheme, yields of the 5 year paper had fallen sharply to 6.31% levels by August, from 6.85% levels in June.
Some, however, believe buying may take time to return, as the Reserve Bank of India's unexpectedly hawkish minutes of the monetary policy committee have rattled markets and raised concerns that interest rates could be headed higher.
Read more: Indian equity markets rally nearly 1% as dollar retreats and US bond yields cool
"A lot of money is sitting on the sidelines, waiting to be deployed, which can happen in a week or two. For now, markets will take some time to absorb the shock after the minutes were released," said Alok Singh, head of treasury, CSB Bank.
Banking system liquidity has been in a consistent high surplus over this month. It was at a ₹3.70 lakh crore surplus on Wednesday, and has had a daily average surplus of ₹3.34 lakh crore this month.
