The benchmark 10-year government bond dipped marginally in the week despite a rise in US Treasury yields. As traders await fresh debt supply through the weekly auction the market was expecting the levels to remain the same through the week.
The benchmark 10-year yield ended at 6.98 per cent as of the weekend from its previous close of 6.99 per cent. The Reserve Bank of India approving the transfer of a record Rs 2.11 trillion in dividends to the government played a major role a week ago, in slumping the 10-year yield below the psychological resistance level of 7 per cent.
Last week the 10-year benchmark yield stood at 7.03 per cent. In response to concerns about higher inflation and growth, US Treasury yields increased to four-week highs. The two-year and 10-year yield curves narrowed their inversion to the narrowest gap in two weeks and the benchmark US 10-year yields settled at 4.62 per cent by mid-week, up from 4.47 per cent at the end of the previous week. The commentary from Minneapolis Federal Reserve Bank President Neel Kashkari played a major role in this and hinted at a reduced probability for Fed rate cuts.
As many as 11 state governments announced an auction through the Core Banking Solution (E-Kuber) system to be conducted on June 4, 2024, to raise a total of Rs 19,500 crore.
Meanwhile Centre in its fourth buyback tranche aims to buy back G-secs worth Rs 40,000 crore maturing within this financial year, after buying back already securities worth Rs 17,900 crore, in auctions that had less receptivity among market participants.
The indicative yield for T-bills currently stands at 6.84 per cent, 7 per cent, and 7.03 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 7.59% GS 2026 indicates a yield of 7.07 per cent.
Moving on to longer tenures, the 7.10% GS 2028 (4-5 year tenure) and the 7.18% GS 2034 (9-10 year range) both show indicative yields of 7.04 per cent and 6.98 per cent respectively.
Amidst RBI paying record dividends to the government, the latter has also reduced the supply of Treasury bills by Rs 60,000 crore till the end of June, as it has enough surplus cash.
The decrease in T-Bill borrowing and RBI paying record dividends to the Centre will make yields lay lower. When rates fall, existing bond prices typically rise, and yields on new bonds decrease, market experts forecast.
The government continues with buying back G-secs that are about to mature shortly, to support the RBI balance sheet. Industry onlookers predict around USD 25 billion worth of passive inflow into India's debt market after the inclusion of Indian government bonds in the JP Morgan Government Bond Index - Emerging Markets (GBI-EM) on June 24, 2024.
Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP suggested that increasing foreign inflows can result in lower bond yields because more Indian debt securities will be in demand.
Considering future yield changes, Srninasan feels investing in short to medium-term bonds is apt for investors without a high-risk appetite and a long-term investment horizon since they are less sensitive to interest rate changes.
