The yield on the 10-year benchmark government paper (7.37 per cent 2014) moved sharply downward on Wednesday, piercing the 6 per cent mark to close at 5.97 per cent, from the day's high of 6.16 per cent on Tuesday.
The sentiment in the government securities market got a shot in the arm with less optimistic consumer confidence data emanating from the United States (suggesting that the Federal Reserve may not hike interest rates at its September policy meeting) and expectations that the domestic inflation rate has peaked with prices of crude oil coming off their record highs.
On Tuesday, US Treasury yields slid to near-five month lows as bond prices rallied.
The prices of gilts at the long end of maturity on Wednesday rose by 70-80 paise while those of medium-end paper jumped by 50- 60 paise. With today's fall, the yield on the benchmark 10-year paper has dropped by 68 basis points since August 11 when it rose to 6.65 per cent. With the fall in yields, banks have been able to substantially cut their losses on their investment portfolios. The bond yield last closed lower than this level on July 27, when it finished at 5.94 per cent.
"If this trend continues and low yields are sustained, there will no need for the RBI (Reserve Bank of India) to grant any sops for balance sheet management for the September quarter," said a treasury head of a state-owned bank.
Panic-stricken banks had sought the RBI's permission to use their investment fluctuation reserve before accounting for the profit and loss account for the first half of 2003-2004.
They had also sought RBI clearance to include SLR investment in the "held to maturity" category to avoid valuing their portfolio as per the current market rate.
Bankers said the yield on June 30 ended at 5.84 per cent and therefore any level below it would be welcome and the investment portfolio would not incur any loss while marking to market the portfolio. Marking to market is an exercise done to evaluate gilts kept for trading purposes as per the current market price.