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Informist, Tuesday, Aug. 26, 2025

By Srijita Bose

MUMBAI – Government bond prices recovered all losses and ended steady Tuesday as traders covered intraday short bets near the end of trade, dealers said. Intraday, prices were sharply down, with the yield on the 10-year benchmark at 6.33%, and the 2035 bond rising near 6.66%, as traders placed short bets on the 10-year benchmark after buying bonds at the state bond auction, they said.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 98.08, or a yield of 6.5997%, against INR 98.10, or 6.5967% yield, Monday. The 10-year benchmark yield hit its highest level since Mar. 19 during the day.

State-owned banks likely bought bonds maturing in 10-15 years as they found yield spreads attractive, dealers said. At close, the yield on the 10-year 2035 bond is nearly 110 basis points higher than the Reserve Bank of India's repo rate of 5.50%, with the yield on the bond at a near five-month high. Some dealers speculated that the Reserve Bank of India or a large state-owned bank bought gilts in the secondary market near the end of trade, which led prices to recover from near the day's lows. 

"Towards the end, there were some intraday shorts covered, and people don't want much of a further gap down in closing levels since the market is already so bad, and we have the GDP also going forward," a dealer at a state-owned bank said. "These are also really good levels and after so much volatility, some support from the RBI should also come." 

Traders sold gilts after the cut-offs at the heavy state bond auction were worse than expected, dealers said. The Reserve Bank of India set the cut-off yield on Rajasthan's 10-year bond at 7.49%, against the median estimate of 7.23-7.26% in an Informist poll for the 10-year bonds. Cut-off yields on other bonds were also higher than expected, including the cut-off yield on Kerala's eight-year bond at 7.52% and West Bengal's 21-year bond at 7.77%.

Fourteen states raised INR 288.92 billion at the auction Tuesday, against INR 341.50 billion notified. Maharashtra did not accept any bids offered at the auction. The lacklustre demand from both state-owned banks and investors such as life insurers and pension funds led to higher cut-offs, dealers said. Traders fear that state borrowing will increase in the current financial year if the proposed reforms in goods and services tax are announced by Diwali, dealers said. The amount notified for Tuesday's state bond auction was much higher than the INR 208.50 billion indicated for the week in the calendar for state borrowing for Jul-Sept.

Traders got the state bonds at levels they considered lucrative. After the auction, traders hedged their exposure from the auction stock by short-selling the 10-year gilt yield, fearing a further fall in bond prices as has been the trend over the past week, dealers said.

Traders also remained uncertain about demand for the long-term gilts at the INR-320-billion gilt auction on Friday, dealers said. The supply is split between the 15-year and 40-year gilts. Price on the 7.09%, 2074 bond fell by INR 1.15 Tuesday, with the yield touching a high of 7.41%. Mutual funds were likely on the selling side in the gilt market, while private sector and foreign banks, which got stock of state bonds at the auction, likely short-sold the 10-year benchmark 6.33%, 2035 gilt, dealers said.

"There is no clarity on how much the impact of GST reforms will be on state borrowing," a dealer at a primary dealership said. "Moreover, even for insurers and pension funds, the growth is not that much, so whatever demand they have is enough in the primary market, which is why in the secondary market, the fall is so bad."

There are no positives to look forward to, as traders do not expect the Reserve Bank of India's Monetary Policy Committee to cut the policy repo rate at its next meeting in October, dealers said. The next big trigger for the market will be the GDP data for the Apr-Jun quarter, due Friday. According to an Informist poll, GDP is seen growing 6.7% in the June quarter, higher than the RBI's forecast of 6.5%. 

Gilts were up amid thin volumes in a volatile early trade. However, due to muted demand and a slight rise in the US Treasury yields, gilts gave up early gains, dealers said. Traders were also cautious ahead of the additional 25% US tariffs on Indian goods set to take effect on Wednesday, with no trade deal between the two countries yet, they said. 

Turnover in the government bond market was INR 506.35 billion, up from INR 432.10 billion Monday, according to data on the RBI's Negotiated Dealing System Order Matching platform. There were no trades using the wholesale digital rupee pilot, the same as Monday. 

E-KUBER GLITCH

Though primary dealers, both standalone and integrated with banks, faced a glitch in setting the price and rate ranges for bidding at the state bond auction Tuesday, bids for state bonds went through and there was no extension in the timing for competitive bids beyond 1130 IST, dealers said.

The setting of price ranges before the auction is a standard practice by bidders. It was introduced by the Reserve Bank of India as a way to prevent "fat-finger" errors, where dealers mistakenly place bids at the wrong price or yield levels. While one bank said it was able to set the price range, some primary dealers said they went through the auction bidding without putting in the bidding ranges. 

"Ultimately, we stopped trying to set the ranges and focused on getting the bids through," a dealer at a private sector bank with an integrated primary dealership said.

OUTLOOK

Money markets are shut Wednesday on account of Ganesh Chaturthi. On Thursday, gilts may take cues from the movement in US yields or any announcement by the RBI that could provide some support to gilt prices, dealers said. Traders will closely track technical levels on gilts. If sentiment worsens and the 2035 bond yield tops the 6.65-6.66% level, 6.68-6.70% could be the next psychologically crucial level to watch out for, they said.

Prices of longer tenure gilts may fall due to the heavy supply of long-term gilts Friday. The government will sell INR 160 billion of the 6.68%, 2040 bond, and INR 160 billion of the 6.90%, 2065 bond at the auction Friday. Traders fear that state borrowing will increase in the current financial year if the proposed GST reforms are announced by Diwali, dealers said. This could lead to muted demand by long-term investors in the secondary market, dealers said. 

Traders are also awaiting India's GDP data for Apr-Jun, due Friday, for further cues on domestic interest rates. Most expect the GDP to be around the RBI's forecast of 6.5%. If the growth is below 6.3%, gilt prices could rise, dealers said. According to an Informist poll, India's GDP is likely to have expanded 6.7% in the first quarter of 2025-26 (Apr-Mar).

On the domestic front, traders await clarity on the impact of the proposed reforms in goods and services tax rates on the central government's borrowing and updates on the additional 25% US tariffs that are set to come into effect on Wednesday.

Bonds may also track the movement of crude oil prices and the rupee against the dollar. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.55-6.68%.

India Gilts: Off lows; recover after stop-losses push 10-yr yield over 6.65%

MUMBAI--1635 IST--Government bond prices were off lows as traders covered their short bets at levels considered lucrative, along with some purchases by state-owned banks. Gilt prices had fallen further after the state bond auction result as cut-off yields were higher than expected, leading to stop-losses as the 10-year benchmark yield topped 6.65%.

"Short sellers will not be initiating naked shorts (sales) at these levels," a dealer at a private sector bank said. "People will be looking to limit losses on illiquid bonds, and so could be locking in spreads."

The Reserve Bank of India set the cut-off yield on Rajasthan's 10-year bond at 7.49%, against the median estimate of 7.23-7.26% in an Informist poll for the 10-year bonds. Cut-off yields on other bonds were also higher than expected, including Kerala's cut-off yield on its eight-year bond at 7.52% and West Bengal's 21-year bond selling at a cut-off of 7.77%.

With lacklustre demand from investors such as life insurers and pension funds, traders got the bonds at levels they considered lucrative. However, fearing a further fall in bond prices as has been the trend over the past week, traders hedged their exposure from the auction stock by short selling the 10-year gilt yield. The 10-year benchmark yield hit its highest since Mar. 19 during the day.

Moreover, traders remained uncertain about demand for the long-term gilts at the INR-320-billion gilt auction on Friday, dealers said. The supply is split between the 15-year and 40-year gilts. 

Turnover in the gilts market was around INR 407.15 billion, higher than INR 351.80 billion at 1630 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.62-6.68%.  (Aaryan Khanna)

India Gilts: Fall more before state bond auction result; bids seen poor

MUMBAI--1410 IST--Government bond prices fell further ahead of the result of the INR 341.50-billion state bond auction. Traders fear high cut-off yields due to lack of investor demand that will weigh on gilt prices further, dealers said.

Demand from insurance firms and pension funds, the usual investors in long-term bonds, was uncertain, dealers said. State-owned banks are looking to buy bonds of only up 15 years at the auction, and their appetite too was subdued as they want to avoid buying illiquid stock at a time when bond prices are falling sharply on a daily basis, dealers said.

"Buyers will also not want to be aggressive at any level unless there is certainty someone is coming to backstop the sell-off, while shorts (short sellers) are having fun," a dealer at a primary dealership said. "Since the price value of waiting is better than actually picking up the bond, no trader will ever buy a gilt in such a market."

Mutual funds were likely on the selling side in the gilt market, while private sector and foreign banks likely short sold the 10-year benchmark 6.33%, 2035 gilt in case they got stock of state bonds at the auction, dealers said. Purchases by state-owned banks kept losses limited, though their purchases were not aggressive and could not drive up prices, they said.

Moreover, there were lack of positives for traders to look forward to, as traders do not expect the Reserve Bank of India's Monetary Policy Committee to cut the policy repo rate at its next meeting in October, dealers said. According to an Informist poll of 17 economists, India's GDP is expected to have expanded 6.7% in the June quarter, higher than the RBI's forecast of 6.5%. The data will be released at 1600 IST Friday. Meanwhile, the INR 320-billion gilt auction on Friday was split between 15- and 40-year bonds, further increasing supply pressure from long-term gilts, dealers said.

Turnover in the gilts market was around INR 226.55 billion on caution ahead of the auction result, lower than INR 275.00 billion at 1430 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.58-6.65%.  (Aaryan Khanna)

India Gilts: Sharply dn before heavy state bond supply; 10-yr gilt yld 6.62%

MUMBAI--0944 IST--Prices of government bonds were sharply down ahead of the heavy supply of INR 341.50 billion worth of state bonds. The yield on the benchmark 10-year 6.33%, 2035 bond topped 6.62%, the highest for a 10-year benchmark since Mar. 26. 

"Already market is expecting bad auction cut-offs (yields), but I think cut-offs will be worse than expectations," a dealer at a state-owned bank said. "...People are saying it (yield on the 10-year benchmark can go to 6.70% also, but let's see because some buying from PSUs (state-owned banks) will come in."

A dealer estimated a yield spread of 100-120 basis points of long-term state bonds over central government bonds of similar maturity at the auction. Some dealers expect some states to reject all bids at the auction due to bids at extremely high levels. 

In the secondary market, private sector banks and primary dealerships continued to refrain from purchasing gilts, due to lack of any triggers that indicate a downward movement in yields. The yield on the benchmark 10-year gilt is seen rising to 6.66-6.70% in the near term, dealers said. However, purchases by state-owned banks limited further losses. Traders preferred purchasing the 10-year benchmark and papers maturing in 14-15 years. Some traders covered short bets, but would continue to short-sell gilts due to lack of positive cues.   

The turnover in the gilts market was around INR 47.30 billion, higher than INR 21.20 billion at 0930 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.56-6.65%.  (Cassandra Carvalho)

India Gilts:Seen steady before large state bond auction; result to lend cues

MUMBAI – Government bond prices are seen opening steady Tuesday at the psychologically crucial 6.60% yield level on the 10-year benchmark gilt after the volatility on Monday. Traders may take cues from the result of the INR 341.50-billion auction of state bonds. With demand uncertain for the fresh supply, gilt prices may fall slightly before the auction as well, dealers said.

The 10-year benchmark gilt yield is seen in a range of 6.56-6.65% on Tuesday. On Monday, the 2035 benchmark bond closed at INR 98.10 or 6.60% yield. Bond prices had fallen sharply for the second straight day after states announced the larger than scheduled auction. Moreover, Fitch Ratings affirmed India's sovereign rating at 'BBB-' with a stable outlook, disappointing some traders who had hoped for positives from a second rating agency after S&P Global Ratings' upgrade earlier this month.

Fifteen states plan to raise INR 341.50 billion through bond issuance, against INR 208.50-billion indicated in the calendar for Jul-Sept. Demand for state bonds was seen lacklustre as state-owned banks had already piled into the higher-yielding assets earlier in the quarter without being able to exit the investments at a profit, dealers said.

State-owned banks have been buying gilts as prices have fallen, but the purchases are acting as a cushion for traders rather than driving up prices, dealers said. Short sellers have been constantly covering and then replacing their bets due to a lack of positives expected in the the near term.

"The big thing is to see what private (sector) banks and foreign banks will do, and when they will start to buy," a dealer at a private sector bank said. "PSU (state-owned banks) are already buying, but they can no longer support the market single-handedly." State-owned banks bought INR 60 billion of gilts on Monday, according to data from the Clearing Corp. of India Ltd.

Another rate cut by the Reserve Bank of India's Monetary Policy Committee is not factored into bond prices despite traders still seeing room for one rate cut in the remainder of 2025, dealers said. Meanwhile, prices will remain under pressure as supply is seen exceeding demand for bonds in the remainder of 2025-26 (Apr-Mar), especially for long-term bonds.  (Aaryan Khanna)

End

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

Edited by Saji George Titus

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