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Informist, Tuesday, Sept. 30, 2025

By Aaryan Khanna

MUMBAI – The government delivered on the bond market's expectations and resolved the demand-supply mismatch at the long end of the gilt yield curve with its borrowing calendar for Oct-Mar. While this caps a runaway rise in long-term bond yields, market participants do not expect duration spreads to fall sharply after the initial reaction. 

As the market had asked, the government cut the supply of 30-50 year bonds to 29.5% in its Oct-Mar issuance plan from 35.0% in the half year ended September. The supply cut out from long-term bonds was assigned to the three-, five- and 10-year segments. This redistribution made longer tenure bonds attractive for both traders and investors, especially as life insurers were said to have batted for a smaller cut in the long-term bond supply.

The glee was reflected in bond prices immediately on Monday, when long-term bonds outperformed short-term gilts and the spread of the 30-year benchmark yield over the 10-year gilt fell to as low as 61 basis points, down 5 bps from Friday. These spreads were last seen in early June, before they spiked to around 75 bps in August and September. At the time, Union Bank of India's research team had recommended buying long-term bonds, a bet that paid off after the calendar announcement. Sustaining these levels, however, may prove difficult for the market.

"The spreads of long-term bonds will remain high as compared to long-term averages but lower than the recent highs," said Akhil Mittal, senior fund manager - fixed income, Tata Asset Management Ltd. "I am holding a flattener of 10x30 in case the RBI (Reserve Bank of India) speaks on yield curve management, because then the spread could fall to as low as 50 bps. But otherwise, if there is a signal of policy easing, we could go back to the 65-70 bps levels."

That policy easing is why traders continue to hold onto bonds maturing in five years, and which is differentiating short-term gilts from the 10-year benchmark, which has been the worst performer since the release of the calendar. Even after two Monetary Policy Committee decisions in which RBI officials seem to have set a high bar for further rate cuts, traders said they would remain ever-enthusiastic on such a possibility as long as macroeconomic fundamentals seem to suggest some room to lower rates. CPI inflation is running well below the central bank's 4% target, and is expected to fall further after a rejig in goods and services tax. The outcome of the ongoing MPC meeting is due Wednesday, and some traders expect a reduction in the policy repo rate of 5.50%.

Another reason to expect wider spreads is the change in the pattern of state bond supply. The calendar for state bonds in Oct-Dec is not out yet, but states' unexpected reliance on borrowing through long-term bonds has also eaten into the market's appetite for gilts of similar tenures, dealers said. As a sample, the auction of the state government securities Tuesday had 12 separate offerings maturing in over 20 years. In contrast, there were only five bonds maturing in 10 years or under. This keeps pension funds and life insurers sated. 

The gilt auctions also run later than usual this year, with the last one in the week ending Mar. 6, against a usual end in February.  While some traders feel the longer calendar may clash with the typically larger state bond auctions, investors believe that is a small price to pay for a smoother ride throughout the second half of the financial year. Moreover, there is some hope that states may have frontloaded their borrowing needs – the issuance of INR 5 trillion in Apr-Sept is 30% higher on year.

"The supply is well spread out this time as the G-Sec borrowing calendar extends into early March," said Churchil Bhatt, executive vice president-investments, Kotak Life Insurance Co. "This in turn means lower long-term gilt supply per week. This should help the market absorb duration supply better in 2H (Oct-Mar)."

Bhatt also expects the yield curve to remain relatively steep, with the spread of the 30-year benchmark over the 10-year gilt settling in a 50-60 bps range. The direction of 10-year bond yield will be guided by the upcoming policy outcome, he said.

To be sure, the tweak in the calendar is much more palatable to banks and other market participants as shorter-term bonds have a lower impact of their price value per basis point move, a big pain point to holders of long-term bonds in a quarter where yields rose across tenors. Still, sharp pickers of tenures may be better rewarded as the case for government bond yields to fall secularly remains limited, analysts said.

"However, a deeper one-sided rally in bond markets would still be constrained amidst absence of steps for supporting markets through: dovish RBI guidance/action ahead, net (RBI) bond purchases, after frontloaded OMOs or moves to trim longer-tenor SDL (state bond) supply, which is also impacting the demand and price of Gsecs," said Madhavi Arora, chief economist at Emkay Global Financial Services.  End

Edited by Avishek Dutta

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