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Informist, Wednesday, Aug. 13, 2025

 

By Aaryan Khanna

 

NEW DELHI – The 10-year government bond yield topped 6.50% for the first time in four months, reflecting increased caution in the government bond market with traders roiled by supply pressures and uncertainty over further rate cuts. Traders have repeatedly hit stop-losses since the benchmark yield rose above 6.40%, and said they have no appetite to stomach the risk of building up long positions again.

 

The benchmark yield has risen over 17 basis points since Aug. 5, the eve of the Monetary Policy Committee decision, to a high of 6.51% Wednesday. Since Reserve Bank of India Governor Sanjay Malhotra announced the policy decision to keep a status quo on rates and stance, benchmark gilt yields have been rising. The central bank's growth-inflation projections for Apr-Jun 2026 suggest a high bar for rate cuts, dealers said. A State Bank of India research report said the country's largest bank did not see repo rate cuts in October and December.

 

However, most of the rise in yields can be attributed to concerns over supply building up and traders exiting long-term bonds. In Apr-Sept, 35% of the central government bond supply is in 30- to 50-year gilts, while states have also tilted supply to bonds maturing above 10 years in the September quarter. Mutual funds likely sold gilts maturing in 30 years or higher following the policy outcome, dealers said. Mutual funds have sold INR 50 billion in the secondary market over the past three trading sessions till Tuesday, according to Clearing Corp. of India.

 

"The pressure is coming from the long-term part of the curve, where mutual funds have likely hit stop-losses," said Nitin Agarwal, head of trading at ANZ Bank India. "In such a volatile environment, the market's risk appetite is weak and there is no telling where IGB yields will go from here, especially ahead of tomorrow's (Thursday's) auction."

 

Moreover, some primary dealerships had also mispositioned on the 50-year bond at auction Friday and had to sell stock of liquid 10- to 15-year paper to mitigate the risk on their portfolio, dealers said. The increasing skew to long-term supply has both led to saturation in investor books, while traders and banks' portfolio managers avoid duration risk. In a recent note, Axis Mutual Fund highlighted how structural positives in the 30- to 50-year government bonds were at the end. State-owned banks said they are seldom buying paper maturing in over 10 years.

 

"However, while the yield direction seems unclear, any emergence of a large buyer could shift sentiment quickly and drive yields lower," Agarwal said. 

 

It seems like that is exactly what happened during the day. Led by purchases by state-owned banks at around 6.50%, the bond market found some support and ran with it, falling to as low as 6.45?fore closing at 6.48%. Short sellers took the opportunity to cover their positions at a profit, after the sharp rise in yields over the past week. Still, trading portfolios will remain light as traders remain wary of continued negatives on the fiscal front. 

 

"Our sense is most of the cut-losses are done, and it is a positive that the market held 6.50% today (Wednesday)," a chief dealer at a large state-owned bank said. "At a 100-bp spread over the repo rate, it is not a bad time to buy for the portfolio – definitely not for trading books right now."

 

Still, state-owned banks' ability to pick up bonds and set the upper end of the trading range has weakened since the introduction of new accounting guidelines in April 2024, market participants said. These banks have already filled up their trading portfolio, and are now adding gilts to their available-for-sale books. At current yield levels, bonds are unattractive to add to held-to-maturity portfolio as banks can no longer shift bonds out of the portfolio at year-end, senior treasury officials at state-owned banks said. 

 

Some sections of the market feared an increase in central government borrowing for 2025-26 (Apr-Mar) after tax collection data for the Apr 1-Aug 11 period showed net direct tax collection was down 4% on year at INR 6.639 trillion. This came at a time when bond traders keep a wary eye on increased government spending to offset the expected growth slowdown on the export front, with the US imposing tariffs of up to 50% on Indian goods imports from Aug. 27.

 

Bankers and primary dealers said a potential recovery in the 10-year gilt would only be to 6.40%, but a more likely outcome is that the benchmark yield climbs to 6.52-6.55?fore fresh supply of INR-300-billion in the 6.33%, 2035 bond next week. Support from mutual funds and life insurers for long-term gilts is likely to be spotty at best despite the lucrative returns, dealers said. Both sets of investors are reliant on flows into their corpuses, which have dried up due to regulatory and tax changes. Retail investors, too, have reduced enthusiasm as returns in debt are not seen as attractive.

 

"The heart and the head want to buy at these levels, but the flows are not supporting," a fund manager at a mutual fund said. "I think any incremental investment will be quite slow."

 

With the torrid pace of yields rising and losses in trading portfolios piling up, traders are at tenterhooks at a time when monetary policy is supposed to be easy. Unless the RBI softens its commentary on further policy easing or the government addresses the fiscal concerns, dealers expect the pain in the government bond market to persist.  End

 

Edited by Deepshikha Bhardwaj

 

 

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