Weekly auction today: Yields rise as FOMC hints at tapering bond buying

However, Jerome Powell warned that the impact of the Delta variant could not be neglected.

Bond yields rose on Thursday after the Federal Open Market Committee (FOMC) indicated tapering its bond-buying programme as the economy had made progress towards goals of low unemployment and stable inflation. The yields on 5.63%-2026 and 6.64%-2035 bonds ended higher ahead of weekly auction, dealers said.

The new 10-year benchmark 6.10%-2031 bonds ended at 6.1975%, which is almost 1 basis point higher than Wednesday’s close. The 5.63%-2026 and 6.64%-2035 bonds ended at 5.7210% and 6.8292% yield, respectively.

The Federal Reserve on Wednesday kept the benchmark policy rate unchanged at zero to 0.25% and said there would be no change in bond-buying programme of $120 billion per month, which consists of $80 billion of treasuries and $40 billion of mortgage securities. The pace of bond buying will continue until “substantial further progress” been made on employment and inflation.

“The economy has made progress towards these goals, and the committee will continue to assess the programme in coming meetings,” the FOMC said in a statement. The statement by the FOMC indicated that the inflation was running ahead of the Fed’s annual target of 2%. However, Jerome Powell warned that the impact of the Delta variant could not be neglected.

“The yields have risen mainly because the Fed has indicated that it will start tapering by the end of the year, so basically they will consider it in next few meetings. The sentiments of traders are largely neutral to slightly negative, and that is why there is mild correction in bond prices,” said Mahendra Kumar Jajoo, CIO, fixed income, Mirae Asset Investment Managers (India).

Meanwhile, the yields on most active and traded 5-year and 14-year bonds rose on supply concern due to its presence in the Reserve Bank of India’s weekly bond auction scheduled for Friday. One dealer with a private bank said demand in the market was low due to supply concerns, most traders have lightened their position ahead of auction. “The demand is weak and supply is constant, that is why yields on government securities are rising,” a dealer with a large private bank said.

On Friday, the central bank will sell bonds worth Rs 32,000 crore, of which Rs 11,000 crore will be of 5.63%-2026 and Rs 10,000 crore will be of 6.64%-2035 bonds. Similarly, the RBI will also sell bonds worth Rs 4,000 crore and Rs 7,000 crore in the segments of GoI FRB 2033 and 6.67%-2050, respectively.

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