Bond yields soar to the highest in three years ::Angel Broking,

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Bond yields soar to the highest in three years
The Indian government’s bond yields have shot up sharply following the announcement of
higher government borrowings for FY2012. The Government of India had announced its
intention to raise additional borrowings of `52,800cr in 2HFY2012 on September 29,
2011. Yields on the benchmark 10-year government bonds have soared to 8.74% (from
8.34% as of September 28, 2011), the highest in three years. Even the shorter tenure, one
and five-year, bond yields have risen by 8bp and 18bp, respectively, over the same period.
This rise is in-line with our expectations that G-sec yields being lower than FD rates would
have an upward bias, even as broader deposit and lending rates peak at more or less
current levels.
While traditionally PSU banks were regarded as bond proxies, in recent years, they have
been reducing their holding of excess government securities above SLR requirements,
especially in the Available For Sale (AFS) portfolio and have reduced the duration of the
AFS investment book, thereby reducing their vulnerability to fluctuation in bond yields.
Having said that, in our view, if the yields stay at current high levels, it is likely to lead to
underperformance of banks with relatively higher AFS investment proportion and/or higher
AFS duration as higher MTM provisions will dent the profitability.