Mumbai: The benchmark 10-year government bond yield zoomed to a five-year high of 9.25 percent Monday after rupee plunged below 63-mark and on the concern that liquidity tightening steps by Reserve Bank will continue for some more time, said treasury officials.
Analysts said higher supply of debt into the market every week has also led to tepid demand for bonds by the market.
The 10-year government bond yield shot up to 9.25 percent today, the highest since August 2008 as the rupee breached the psychological level of 63-mark. The bonds closed the trade at 9.23 percent.
The currency fell to an intra-day low of 63.30 before closing at 63.13.
"The rise in bond yield is a combination of fall in the rupee, over-supply of debt and RBI's liquidity tightening measures," said Ananth Narayan, co-head, wholesale banking, Standard Chartered Bank India and South Asia.
The Reserve Bank will be selling Rs 22,000 crore of cash management bills, Rs 15,000 crore of government bonds, Rs 12,000 crore worth of T-bills this week.
"Given the huge supply of debt, there is less demand from banks which are sitting on huge mark-to-market losses and also from foreign institutional investors," Narayan said.
Dealers said the apex bank's stand to keep short-term interest rates higher at 10.25 percent will continue for some more time and hence there is lack of interest in market.
To curb rupee volatility, RBI had been announcing since July 15 some unconventional measures such as limiting banks' overnight borrowing at 50 percent of their net demand and time liabilities, more sale of government bonds and raising the interest rate on the marginal standing facility for banks and reduced availability of funds to curb speculation in the forex market.
"There is collateral damage to bonds. Nobody in the market is confident," said Vijay Sharma, executive vice president at PNB Gilts.
Overseas investors have pulled close to USD 11 billion from debts since May 22 when the US Fed indicated that it would turn the tap on easy money sooner than anticipated.