The Hindu Business Line : Bond prices crash as panic grips market; rate hike feared

BOND dealers were seized with a sense of panic on Friday as the market witnessed the highest inflation rate in three-and-a-half years, which dragged down bond prices by over a rupee across medium term maturities. The 10-year bench mark yield hardened by 18 basis points in a single day to a yield-to-maturity (YTM) of 6.31 per cent.

The inflation rate, which was pegged at 7.51 per cent for the week ended July 24, fanned fears of rising interest rates, which led to aggressive sell-offs amid thin market volumes of around Rs 2,200 crore, according to dealers.

The latest surge in inflation, although expected, came as a blow to the confidence of the market. On Thursday, Mr Ashok Lahiri, Chief Economic Advisor of the Finance Ministry, issued a statement that the inflation rate had "peaked " at 6.52 per cent.

Despite repeated assurances from the Finance Ministry and the Reserve Bank of India that inflation will be reined in at around five per cent levels by the end of this fiscal, the markets are nervous about a further rise in inflation.

"The rise in inflation was beyond expectation. With the domestic fuel price hike not taken into account for the present number, further hike is expected in inflation," said Mr M. Natrajan, Head Money Markets and Investments, IndusInd Bank.

"Things are not looking up for the bond market even as the issue of Government stock comprising Rs 6,000 crore of floaters is due on August 9.

Another oil price hike also seems to be on the cards."

Bond prices opened stronger but plummeted following the announcement on inflation.

The 7.37 per cent 2014 10-year benchmark paper opened at Rs 109 and dropped to Rs 107.80 at close.

The 7.38 per cent 2015 11-year benchmark paper plunged to Rs 107.80 from Rs 109.05 before the inflation news. Yield on the paper soared to 6.39 per cent.

Mr Rajat Kumar, Director, Fixed Income, Standard Chartered Bank, said: "The yield on the 10-year paper is expected to rise to 6.45 per cent in the next three weeks with the inflation number likely to spurt to eight per cent."