The benchmark 10-year government bond, which had inched up higher during the week when the 2024 Lok Sabha election results were announced, trickled down towards the end of the week.
The Reserve Bank of India’s (RBI’s) Monetary Policy Committee’s (MPC’s) decision on June 7, 2024 didn’t have much impact on the 10-year yield either, which ended at 7.01 per cent at the end of the week.
Earlier in the week, the same yields had surged a whopping 9 per cent basis point (bps), touching 7.09 per cent when the Lok Sabha election results showed that the Bharatiya Janata Party (BJP) could only form the government with support of the National Democratic Alliance (NDA) alliance partners. Since then, the debt markets have recovered and reached 7.01 per cent yield on 10-year government bonds, up by 3 bps from last week’s close at 6.98 per cent.
Now, the support shown by alliance partners, and the RBI transferring a record dividend of Rs 2.11 trillion recently, is expected to keep the yields stable, as these factors give the government room to stay on course on its fiscal consolidation goals.
The 10-year US yield showed its biggest single-day jump in two months to end the week at 4.43 per cent, after the government employment report hinted that job growth is picking up, which may prompt the US Federal Reserve to implement rate cuts. Meanwhile, the European Central Bank (ECB) also implemented rate cuts after Bank of Canada, pushing up the Euro zone government bond yields.
As many as seven state governments plan to conduct an auction through the core banking solution (E-Kuber) system on June 11, 2024 to raise a total of Rs 7,750 crore. On June 6, 2024, RBI accepted bids worth Rs 7,287.56 crore out of Rs 30,000 crore worth of securities it had offered in its fifth buyback program. The reception from participants continues to be low, while the bids participants make are at lower yields than expected by the RBI.
The indicative yields for T-bills currently stands at 6.86 per cent, 7.01 per cent, and 7.03 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 5.63% GS 2026 indicates yield of 7 per cent.
Moving on to longer tenures, both the 7.37% GS 2028 (4-5 year tenure) and the 7.10% GS 2034 (9-10 year range) show indicative yields of 7.02 per cent and 7.01 per cent, respectively.
A decrease in government T-Bill borrowing and the RBI paying record dividend to Government of India are expected to keep the bond yields stable at a low level.
Further, RBI has kept the repo rates unchanged, and bond yields may remain stable until RBI’s potential moderate rate cuts in future, which might push down yields moderately. Experts forecast that in a long tenure of 3-5 years, broader economic environment, inflation trends, and interest rate cycles are factors that should be monitored, as they will influence bond yields.
Investing in short- to medium-term bonds is recommended because they are less sensitive to interest rate changes, thereby reducing volatility.
According to industry experts, it would be advisable to invest across sectors and issuers to reduce exposure to credit risks. Indian government bonds are set to be included in the JP Morgan Government Bond Index – Emerging Markets (GBI-EM) on June 24, 2024, and approximately $25 billion worth of inflows will come into India’s debt market.
