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Informist, Monday, Aug. 25, 2025

 

By Aaryan Khanna

 

MUMBAI – The rout in the government bond market last week has shaken the nerves of even veteran traders. The yield on the 10-year gilt rose 15 basis points, the sharpest weekly rise since the week ended Sept. 23, 2022. The yield on the 6.33%, 2035 bond jumped to 6.55% by Friday as the proposed goods and services tax rationalisation led alarmed bond traders to expect additional supply of bonds. This was despite India's rating upgrade by S&P Global Ratings.

 

However, fundamental and technical factors don't seem to suggest bond yields are likely to jump much further. This possibly kept the yield on the benchmark bond from rising above its 200-day moving average, a key technical level, dealers said. "In terms of the negatives, most have already played out, whether they be fiscal concerns or the RBI increasing the overnight rates," a dealer at a private-sector bank said. "Since the worst has already been factored in, there should be enough demand in another 5 basis points from here to support the market."

 

To be sure, no one expects a drastic turnaround. Traders who have kept to the sidelines at ever-increasing yield levels have expressed willingness to enter with double the cash should a positive trigger emerge.

 

And unlike that September 2022 week when the US Federal Open Market Committee's sharp rate hikes roiled global markets, US Federal Reserve Chair Jerome Powell Friday seemed to suggest some long-awaited policy easing would come through quickly. Noting weakness in the labour market and considering a base-case when increased tariffs have a one-time impact on inflation, Powell said a change in the US Fed's stance on rates might be necessary. After cutting its policy rate by 100 bps in Sept-Dec, the US rate-setting panel has held policy rates steady so far in 2025 despite pressure from President Donald Trump.

 

Some traders remain hopeful that the Reserve Bank of India's Monetary Policy Committee will follow suit in Oct-Dec. Others say slowdown in India's growth because of the scheduled imposition of 50% tariff on exports to the US will drive the rate-setting panel's decision organically, especially as the members expressed concern about the impact of tariff in the minutes of the meeting detailed last week. Though GDP data scheduled this week is unlikely to provide a fillip to the market in terms of rate cut hopes, even the most pessimistic traders do not see an increase in the repo rate from the current 5.50% in the next 12 months. Economists, including those from State Bank of India, see GDP growth for the June quarter above the RBI's forecast of 6.5%.

 

"Action of rate cut by Fed in September will actually open the door for RBI to follow suit in face of slowing credit and economic growth," said Vishal Goenka, founder of IndiaBonds.com, an online bond platform provider. "In the medium term... these are good levels to add duration to fixed income portfolio as we remain in a cyclical down cycle for interest rates and given the lack of transmission on recent cuts into the banking system..."

 

Once the volatility eases, buyers will look to take advantage of being offered four-month high yields. Another advantage is that the supply of the 10-year benchmark 6.33%, 2035 gilt has been absorbed by the market, and its next auction isn't slated for four weeks. Still, the near-term bottom on the 10-year gilt yield is seen at 6.40% while at the top-end, traders see the benchmark yield as high as 6.68% as the trading range resets.

 

A strong barrier to yields going down now is the demand-supply dynamics, with no relief likely this month. Come September, market participants will look to convince the government to issue fewer long-term bonds in Oct-Mar through their scheduled dialogue with the RBI. There have been mounting questions about investor appetite due to the supply of long-term bonds issued by both the Centre and states, at a time when demand for bonds from life insurers – the largest structural buyers of gilts maturing in 30-50 years – has anecdotally remained subdued.

 

State-owned banks were net buyers every day of last week, picking up over INR 120 billion worth of gilts in the secondary market, Clearing Corp. of India data showed. They may continue to buy and as yields drift higher, some may choose to add gilts to their held-to-maturity books, dealers said. However, the breadth of the market may remain a bit more cautious with their investment decisions after multiple stop-losses on trading portfolios last week. The 10-year gilt's yield above 6.60% is considered a buy from every section of the market, but they'll wait for others to take the plunge before them.

 

"Market sentiment remains negative, driven by concerns over fiscal slippages and higher borrowings on account of GST rationalisation and the fiscal package expectations to support exporters in affected sectors," said V.R.C. Reddy, head of treasury at Karur Vysya Bank. "...that said, the current spread of 110–120 bps between overnight rates and the 10-year yield offers an attractive carry in an environment where no immediate policy tightening is expected. In my view, these levels present a good buying opportunity, though it may be prudent to wait a few more weeks for the dust to settle and for genuine value-buying opportunities to emerge."  End

 

Edited by Ashish Shirke

 

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