Why cutbacks in government borrowing failed to appease the bond market

On Monday, the government left its total market borrowing unchanged at ??$ 12.05 trillion and said the Goods and Services Tax (GST) offset loan would be covered by the existing loan.

“While there is no surprise on the market borrowing component, the subsumption of ??An offsetting loan of GST 84,000 crore (expected to be provided to states in the second half of FY22) against the remaining amount of borrowings in the market was a relief, ”QuantEco analysts wrote. Research Ltd in a note.

In addition, the supply on the most crowded 10-14 year maturities would be lower than last year. The share of these tenures in the overall loan would be less than 44% during the current financial year against a share of 46% during financial year 21. This should have relieved the benchmark 10-year bond yield.

But the bond yield stabilized on Tuesday at 6.23%.

Suyash Choudhary, head of fixed income at IDFC Mutual Fund, points out that the offering of government development bonds and even corporate bonds would occupy this segment. In addition, the reduction in borrowing for the second half of the year was largely within the five-year term.

“All of this implies a stronger headwind for longer bonds and gives us greater confidence in our opinion that the 5-10-15 year spreads are unlikely to decline significantly from here on out,” and that the best play on the current slope of the curve (and the best carry adjusted for the duration value) is in the space of 5 years, “he wrote in a note.

The result is that long-term bond yields are unlikely to fall much, at least in response to supply triggers. As such, it remains to be seen whether the government will be able to keep its promise to borrow what it has announced.

The Union government has a checkered record in sticking to its borrowing plan. Care Ratings analysts point out that the earnings outlook is not so rosy. The divestment target is raised to ??1.75 trillion and any deceleration in economic activity would affect the tax grab going forward.

What about the demand for bonds?

Here, the gossip around the inclusion of Indian bonds in global indexes is good for sentiment.

But an uncertain piece is the Reserve Bank of India’s move towards an unwinding accommodation.

It remains to be seen whether the central bank would end its G-Sec Acquisition Plan (G-SAP) in an attempt to stop increasing excess liquidity. In a September 23 article, Mint pointed out how limited the effectiveness of G-SAP has been in controlling bond yields.

As such, the Reserve Bank of India (RBI) gave signs of a shift in liquidity focus by selling the bonds through an open market auction last week.

This brings us to the final upsetting factor: oil prices. Fears of an energy crisis from Europe to China have gripped world markets, pushing up oil prices. High oil prices have deteriorated the outlook for domestic inflation and monetary policy.

In addition, the potential impact of an energy crisis on global growth could also have a moderating effect on the national economy.