10-Year Govt Bond Yields Ends At 7.09% Picking Up After Budget-Led Dip; More Bank Issuances Ahead

Indian government bond yields rose this week, partially reversing the fall triggered by a fiscally prudent federal budget. Further, the RBI had also maintained the repo rate at 6.5 per cent in the latest MPC meeting. Following its previous close of 7.07 per cent, the benchmark 10-year yield ended at 7.09 per cent, the highest level since January 31, 2023. The yield rose 5 basis points this week, the most since the week ended January 5, 2023. Nevertheless, the budget is expected to lead to less borrowing by the government in FY25 and will reduce pressure on Bond yields.

RBI Governor Shaktikanta Das said on Thursday that "the last mile of disinflation is always the most challenging". The central bank wants more assuring figures on inflation before lowering repo rates. It pegged retail inflation at 5.4 per cent in 2023-24 and expects it to ease to 4.5 per cent in the next financial year.

Centre raised Rs 33,000 crore through bond sales, including Rs 16,000 crore in 10-year bonds. Meanwhile, 9 state governments plan to auction securities worth Rs 17,500 crore via the RBI Core Banking Solution on February 13, 2024.

Indian bonds are expected to attract about USD 100 billion of foreign inflows in the coming years, due to its JM global bond index inclusion in the upcoming June. A mere 10 per cent weight in the JP Morgan bond index is expected to bring inflows of about USD 20-30 billion.

Bond market experts continue highlighting that the rate hikes have peaked, signalling an imminent rate-cutting cycle and the opportune moment to lock in on high accrual income.

Treasury And Bond Yields

The indicative yield for T-bills stands at 7.01 per cent, 7.15 per cent, and 7.71 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 7.72% GS 2025 show a yield of 7.04 per cent.

Moving on to longer tenures, both the 7.37% GS 2028 (4-5 year tenure) and the 7.18% GS 2033 (9-10 year range) show yields of 7.05 and 7.09 per cent, respectively.

Private placement of corporate bonds in January 2024 fell by 35 per cent compared to December despite lower borrowing costs. Canara Bank is planning to raise Rs 20 billion via tier-I bonds and seeks bids next week. Bank of Baroda also mulls raising to Rs 25 billion via 10-year tier-II bonds.

Traders are now waiting for the January retail inflation print, due on February 12, 2023, which will be followed by U.S. inflation the next day for further triggers on bond yields. Market experts say it could be a good time to lock in high accrual income by holding bonds until maturity now that interest rates have peaked. Adding higher duration to the portfolio looks attractive from a risk-reward perspective since investors will benefit from future rate cuts and can ride the yield curve down.