Yield on the 10-year benchmark government paper yield slid to its lowest level in nine months, bringing down cost of borrowing across the economy, as a fall in US bond yields and a favourable view on domestic demand-supply dynamics for bonds spurred appetite for sovereign debt.
The 10-year benchmark bond yield closed at 7.01%, its lowest level since June 14, 2023, Bloomberg data showed. In the previous day’s trade, the benchmark bond yield had settled at 7.03%. Bond prices and yields move inversely.
Government bond yields are the benchmarks used for pricing bonds issued by companies.
Easing liquidity conditions in the banking system also improved the view on government bonds, although a further decline in yields was reined in ahead of two crucial data releases on Tuesday – inflation data for the US and India.
Yield on the 10-year US bond touched a five-week low of 4.05% on Monday, having registered a steep decline from 4.25% at the end of last month. A fall in US bond yields increases the appeal of relatively higher-yielding fixed-income instruments in emerging markets such as India.
While American employment data released last week showed a higher-than-expected addition in jobs in February, a rise in the US unemployment rate strengthened hopes that the Federal Reserve would cut interest rates by June.
“Market gauges are now predicting more than 70% chance of a Fed rate cut in June and that gives room for our 10-year bond yield to fall to 6.90% levels in coming weeks,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership. “The enthusiasm in our market is being driven by a favourable view on demand-supply, which is something that traders have not seen in years,” he said.
With two sets of global bond index managers – JP Morgan and Bloomberg – having included Indian bonds in their emerging market indices, foreign inflows worth around $30 billion in domestic bonds are estimated over the next 10-15 months.
Further, with India’s inflation seen on a downward path in coming months, bankers expect the Reserve Bank of India to also take a turn towards easier monetary policy later in 2024. A Reuters poll estimated India’s Consumer Price Index inflation at 5.02% in February, down from 5.10% a month ago.
“When the RBI eventually starts the easing cycle, we expect them to run liquidity surpluses and let the call rate trade below repo – we forecast one 25 basis point cut each in Q3 (July-September) and Q4 (October-December) CY24,” Santanu Sengupta, chief India economist, Goldman Sachs wrote in a March 8 report.
The combination of easier liquidity conditions, rate cuts and firm overseas demand would ensure seamless absorption of the Rs 14.1 trillion worth of bonds that the Centre plans to sell on a gross basis in FY25, dealers said.
Another factor that has propelled domestic bond yields lower in the current quarter – the 10-year bond yield had closed at 7.17% on December 29 – is a sharply lower-than-expected quantum of borrowing by state governments. So far in Jan-March, states have borrowed Rs 2.3 trillion through bonds, 26% lower than the quantum that they had announced at the end of December, RBI data showed.
