The bond market has shown signs of tremendous investment potential, with interest rates peaking at home and abroad. This week, the US Federal Reserve has kept its benchmark rate unchanged at 5-5.25 per cent to revitalize the economy, although concerns on the inflation front remain.
Since April, the Reserve Bank of India (RBI) has also softened its stance on repo rate hikes to allow credit growth and spur economic activity ahead of the national election. The market, including the bond segment, has been receptive to these changes as yields seemed to plateau.
The yield on government securities stayed almost flat amid signals that RBI’s rate-raising campaign might be winding down. For next week’s auction, the yield on Treasury bills (T-bills) is not majorly different from the previous week, a trend that remained consistent in recent weeks.
The yield for three-month, six-month, and 364-day T-bills is 6.75 per cent, 6.89 per cent, and 6.89 per cent, respectively, almost the same as last week’s return. In addition, for bond auction this time, four states have announced participation—Andhra Pradesh, Jammu and Kashmir, Tamil Nadu and Mizoram.
Jammu and Kashmir is offering the highest interest rates of 7.44 per cent for its bond, maturing on June 21, 2035, followed by Andhra Pradesh at 7.42 per cent, maturing on June 21, 2040.
Bond Market Trends
Although the Fed paused its policy rates, it hasn’t ruled out two more hikes this year, depending on inflation. Following that decision, the Indian bond market yields went up by a few basis points. For instance, the 10-year government bond yields closed at 7.04 per cent on Friday.
Says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP and former Senior Vice President of Debt Capital Market at ICICI Securities: “Banks are continuously receiving deposits due to the withdrawal of 2000 rupee notes, increasing the banking system liquidity. RBI is also continuing its efforts to drain out the additional liquidity through multiple VRRR auctions.”
Srinivasan adds, “The bond market is expected to trade flat, with an upward bias in yields.”
He believes the market is not expecting any rate hikes in the forthcoming RBI MPC policies as the interest rate has almost peaked. Therefore, long-term investors rush to lock in their funds in long-tenor bonds. “It has also created an impression of yield curve inversion in the corporate bond market,” says Srinivasan.
Data from Rockfort Fincap LLP show an impressive investor demand in the corporate bond market. The AAA-rated NabFid has raised Rs 10,000 crore from the 10-year bond for the first time at a 7.43 per cent annualised yield, with a spread of only about 25 basis points (bps) over the 10-year government bond.
“Going by the GoI (government of India) and SDL (state development loan) borrowing calendar, we have large long-term tenor bond issuances scheduled in the forthcoming government bond auctions. Further, with HDFC constantly issuing long-term debentures before its merger along with continuous long-term tenor bond issuances from Public Sector Undertakings (PSUs), we expect that the corporate yield curve inversion is not going to be that easy,” says Srinivasan.
With the expected large supply of government and corporate bonds, he says it will be worth watching whether the demand exceeds supply in creating the corporate bond yield curve inversion.
