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Informist, Tuesday, Jul. 1, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended sharply higher due to a fall in US Treasury yields, with the 10-year US yield falling to a two-month low, dealers said. Foreign banks and portfolio investors bought gilts maturing up to 10 years, while some state-owned banks trimmed their holdings of shorter-term gilts and picked up the 10-15-year bonds for their held-to-maturity portfolios.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.26, or 6.29% yield, against INR 100.03, or 6.32%, Monday. The most-traded 6.79%, 2034 bond closed at INR 103.02 or 6.35%, against INR 102.78 or 6.39% Monday. Both gilts closed near the day's highest price, with buying momentum picking up from traders due to an intraday fall in US yields.

The yield on the 10-year benchmark US Treasury note fell to 4.19% intraday, its lowest since May 2, from 4.22% at 0900 IST, and 4.26% at 1700 IST Monday. US yields fell sharply as traders positioned for the US Federal Open Market Committee to cut rates by 75 basis points in 2025, a sharper cut than the median estimate of 50 bps by US Federal Reserve officials in June. Traders will take cues from US Fed Chair Jerome Powell's remarks at a central banking event in Portugal after market hours Tuesday, as well as non-farm payroll data later this week, to firm up their bets on a July rate cut by the FOMC. 

"The differentials have come off and are around 210 bps now from around 170 bps a few weeks ago," a dealer at a foreign bank said, referring to the spread of the 10-year gilt yield over the 10-year US Treasury yield. "FPIs have not seen this in months, but now US yields are showing signs of structural weakness that could lead to asset allocation here and in other emerging markets."  

Data from the Clearing Corp. of India at 1830 IST showed FPIs had bought INR 23.65 billion worth of fully accessible route gilts Tuesday, their third straight day of hefty buys. Since Thursday's close, foreign holdings of these bonds, which have no limits on FPI ownership, have increased by over INR 100 billion. The spate of purchases belies a disappointing June quarter for India's bonds, with foreigners selling nearly $3 billion worth of fully accessible route gilts in the quarter. The bulk of the purchases Tuesday were in bonds maturing within 10 years, the data showed.

The result of the state bond auction had limited impact on gilt prices, though the 10-year cut-off yields were set slightly higher than expected at 6.80-6.86%. While the cut-offs for 10-year bonds of most states were at 6.80%, in line with estimates in an Informist poll, the higher cut-off of 6.86% for Assam's 10-year paper was an aberration and did not lend cues to gilts, traders said. Moreover, cut-off yields on long-term state bonds were in line or slightly better than expectations.

State-owned banks were buying both Central and state bonds maturing in 10-15 years for their investment books as they considered the spreads of these bonds over the repo rate lucrative, dealers said. The 10-year benchmark gilt's spread over the repo rate was at 82 bps Monday, and the 15-year benchmark 6.92%, 2039 bond's spread was at 117 bps, higher than usual in a situation where monetary policy tightening looks unlikely in the rest of the financial year ending March, they said. Marginal funding costs for trading positions in gilts are even cheaper, at around 6.30-6.35%, despite the RBI's variable rate reverse repo auction last week to mop up liquidity.

"How much time can the market react to the same trigger? Eventually it will be priced in and played out, provided the RBI doesn't do it too often," a dealer at a private sector bank said. "Running a flattener for the rest of the week looks like a good trade considering how steep the curve is, and the auction should act as a good litmus test."

However, some dealers expect longer-term bonds to remain in favour this week despite fresh supply since the RBI is unlikely to allow overnight rates to remain at 5.25%, weakening the case to hold onto short-term gilts, which are sensitive to rate movements, dealers said. Meanwhile, bonds maturing in 10 years or more may be sensitive to an expected further decline in US yields, which also led traders to pick up these bonds Tuesday. The government will sell INR 160 billion each of a new 15-year, 2040 bond and the 6.90%, 2065 gilt at auction on Friday.

Turnover in the government bond market Tuesday was INR 580.35 billion, higher than INR 407.55 billion Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were two trades worth INR 100 million through the wholesale e-rupee pilot, against none on Monday.

OUTLOOK

On Wednesday, bond prices may take cues from the overnight movement of US Treasury yields. Traders said the impact on US rate expectations after Fed Chair Jerome Powell's speech at the European Central Bank forum at Sintra in Portugal may lend direction to gilts, dealers said.

On the domestic front, traders will now watch for any further announcement of variable rate reverse repo auctions by the RBI. Traders are closely tracking overnight money market rates, which settled close to the Standing Deposit Facility rate Tuesday after two days near the repo rate on Friday and Monday. State-owned banks may purchase gilts for their held-to-maturity books at the start of the Jul-Sept quarter, dealers said. 

A sharp movement in crude oil prices may also lend cues. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.25-6.34% Wednesday and that on the most-traded 6.79%, 2034 bond is seen at 6.31-6.39%.

India Gilts: Up more as US yields fall intraday, banks buy for HTM books

MUMBAI--1530 IST--Prices of government bonds rose further tracking a fall in US Treasury yields intraday, dealers said. Foreign portfolio investors likely purchased gilts through foreign banks. Some private and state-owned banks also picked up gilts for their held-to-maturity books, dealers said.

The yield on the 10-year benchmark US Treasury note fell to a two-month low of 4.19%, from 4.22% at 0900 IST, and 4.26% at 1700 IST Monday. US yields fell further as traders expect a quicker pace of rate cuts by the US Federal Open Market Committee, with at least three rate cuts in the remainder of 2025. Traders await comments by US Federal Reserve Chair Jerome Powell, who will join other central bank chiefs at the European Central Bank forum in Sintra, Portugal. Powell's remarks may offer some insight into the US economy and monetary policy decisions.

The rise in the rate differential between US Treasuries and Indian government bonds led FPIs to purchase gilts maturing in up to 10 years, dealers said. As of 1530 IST, FPIs purchased gilts worth INR 10.38 billion Tuesday through the fully accessible route, data from Clearing Corp. of India showed. The spread of the 10-year US Treasury yields and the 10-year Indian benchmark 6.33%, 2035 gilt yield widened to 211 basis points from 206 bps Monday. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors.

State-owned banks are purchasing gilts for their held-to-maturity books at the beginning of the Jul-Sept quarter, dealers said. Traders also bought state bonds at the auction for their held-to-maturity books, dealers said. Demand at the state bond auction was robust, and cut-off yields were along expected lines. Demand from long-term investors such as insurance companies also lowered cut-offs on the longer-end of the state bond curve, dealers said.

Traders purchased the 6.79%, 2034 gilt on bets that the spread between the repo rate of 5.50% and the gilt's yield would compress. "The spread between the repo and the 10-year gilt is just too much," a dealer at a state-owned bank said. "I think the 10-year (yield) will move downwards to around 6.35% and 6.30% also possibly." Some traders also purchased the 15-year 6.92%, 2039 gilt, and long-term bonds, due to yields seen lucrative, dealers said.

At 1530 IST, the turnover in the gilts market was INR 403.40 billion, higher than INR 248.75 billion at the same time Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.28-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.33-6.40%.  (Cassandra Carvalho)

India Gilts: Remain up; demand for state bonds at auction firm

India Gilts: Remain up; demand for state bonds at auction firm

MUMBAI--1208 IST--Government bond prices remained up tracking a fall in US Treasury yields, dealers said. Buys from foreign banks and state-owned banks led to a rise in prices, they said. The demand for state bonds at Tuesday's auction was firm, dealers said.

"The whole yield curve is shifting and good buys are coming from across segments," a dealer at a private sector bank said. "US yields are also supported at these levels and we are also seeing some foreign flows."

With US President Donald Trump looking to replace Federal Reserve Chair Jerome Powell, expectations of rate cuts in the US have increased. According to the CME FedWatch tool, traders still see a 78.8% probability of the Fed holding rates at the July meeting of the Federal Open Market Committee, though the chances of three rate cuts during the rest of 2025 have increased. The yield on the 10-year US Treasury note fell to 4.21% from 4.26% at 1700 IST Monday. Foreign portfolio investors likely bought gilts as the interest rate differential on the 10-year gilt with the safe haven asset widened, dealers said. FPIs bought nearly INR 49 billion worth of gilts through the fully accessible route on Monday, data from Clearing Corp. of India showed.

The yield spread on the 6.79%, 2034 gilt over 6.33%, 2035 bond narrowed below 6 basis points from a little over 6 bps Monday, and from 8-9 bps on Friday. Traders expect the yield spread to further compress to nearly 3-4 bps by the end of this week, dealers said. Traders picked up the 2034 paper as they expect the yield on the bond to further fall below 6.35% in the near term as traders re-adjust their portfolios to bring down the spread with the 2035 bond, they said. Traders also continued to prefer other similar tenure gilts such as the 7.10%, 2034 bond and the 7.18%, 2033 bond due to attractive yields, they said.

At the INR 181 billion state bond auction, demand from banks and insurers was seen firm, dealers said. However, demand for Andhra Pradesh's 12-year bond is expected to be mixed with some state-owned banks likely to opt for the paper due to attractive yields, while others said banks will likely pick up state bonds maturing in up to 10 years at the auction, dealers said. Lower-than-expected size of the state bond auction Tuesday also led insurers to pick up longer tenure gilts in the secondary market. Some dealers said demand for forward rate agreements from insurers was likely. 

With only one Gujarat's eight-year bond worth INR 10 billion offered at the state bond auction, demand for gilts maturing in five-eight years also rose in the secondary market, dealers said. Some traders bought shorter-tenure gilts as they expect the yield spread on the 10-year benchmark gilt over these gilts to widen. The spread on the 2035 bond over the five-year benchmark 6.75%, 2029 gilt is 33 bps currently. However, some traders feared that the Reserve Bank of India could announce more variable rate reverse repo auctions, which capped gains in gilts, dealers said. 

The turnover in the gilts market was INR 122.00 billion at 1130 IST, slightly higher than INR 106.65 billion at the same time Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.28-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.33-6.40%.  (Srijita Bose)

India Gilts: Up on fall in US yields; PSU banks likely buyers

MUMBAI--0953 IST--Government bond prices rose due to an overnight fall in US Treasury yields, dealers said. State—owned banks are likely to have bought gilts for their held-to-maturity books, which also led to a rise in prices, they said. 

State-owned banks bought gilts maturing in up to 15 years for their held-to-maturity books as the Jul-Sept quarter began Tuesday, dealers said. Demand from state-owned banks is also expected to be firm for shorter tenure state bonds at the auction Tuesday, they said. Insurers also picked up bonds maturing in 30-40 years, dealers said. Demand from them at the state bond auction for longer tenure bonds is also expected to be firm, they said. However, most expect the yield spread on state bonds over gilts to remain at around current levels, dealers said. 

The yield on the 10-year US Treasury note fell to 4.21% from 4.26% at 1700 IST Monday. Traders await comments by US Federal Reserve Chair Jerome Powell at the European Central Bank forum in Sintra in Portugal Tuesday. Powell's remarks may offer some insight into the US economy and monetary policy decisions. "US yields are definitely giving some support to the market because partly they are pricing in three rate cuts (by the Federal Open Market Committee)," a dealer at a primary dealership said. "There is still caution over VRRR (variable rate reverse repo) auctions, but if they choose to just roll over (last) Friday's VRRR, there will be no impact." 

Uncertainty about the Reserve Bank of India's future moves on liquidity management capped the gains in gilts, especially shorter-tenure gilts, dealers said. Some traders said the central bank might announce another variable rate reverse repo auction Tuesday, after conducting a VRRR auction for INR 1.00 trillion Friday.

The turnover in the gilts market was INR 30.75 billion at 0930 IST, similar to INR 30.65 billion at the same time Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.28-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.33-6.40%.  (Srijita Bose)

India Gilts: Seen opening steady; state bond auction results may lend cues

MUMBAI – Government bond prices are seen opening steady due to lack of fresh domestic cues, dealers said. Later in the day, traders may take cues from the results of the INR 181-billion state bond auction, they said.

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.30-6.35% during the day. The gilt ended at INR 100.03 or 6.32% yield on Monday. For the most-traded and erstwhile 10-year benchmark, 6.79%, 2034 gilt, traders expect a range of 6.33-6.40%. The 2034 gilt closed at INR 102.78 or 6.39% yield Monday.

The yield spread on the 6.79%, 2034 gilt over 6.33%, 2035 bond narrowed to 6 basis points on Monday from 8-9 bps on Friday. Traders expect the yield spread to further compress to nearly 3-4 bps by the end of this week, dealers said. This may lead traders to short-sell the 2035 bond while buying the 2034 paper, they said. Traders may also continue to prefer other similar tenure gilts such as the 7.10%, 2034 bond due to attractive yields, they said. 

Demand for bonds maturing in 11-14 years at the state bond auction may be poor, as has been the case for past two weeks, they said. However, demand from state-owned banks for their held-to-maturity books may drive up demand for shorter tenure state bonds, dealers said. State-owned banks may also purchase gilts for their held-to-maturity books at the start of the Jul-Sept quarter, which may lead to a rise in prices during the day, dealers said. 

Uncertainty about the Reserve Bank of India's future moves on liquidity management may keep gilts from rising, especially shorter-tenure gilts, dealers said. Some traders said the central bank might announce another variable rate reverse repo auction Tuesday, after conducting a VRRR auction for INR 1.00 trillion Friday.

Prices may also tick up due to an overnight fall in US Treasury yields, dealers said. The yield on the 10-year US Treasury note fell to 4.22% at 0820 IST from 4.26% at 1700 IST Monday. However, traders await comments by US Federal Reserve Chair Jerome Powell, who will join other central bank chiefs at the European Central Bank forum in Sintra in Portugal. Powell's remarks may offer some insight into the US economy and monetary policy decisions. Traders will also watch whether the Senate passes US President Donald Trump's contentious spending bill. Trump is urging lawmakers to pass it before the Jul. 4 Independence Day holiday.  (Srijita Bose)

End

US$1 = INR 85.52

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Saji George Titus

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