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Informist, Thursday, Apr. 16, 2026

By Janwee Prajapati

MUMBAI – Prices of government bonds fell Thursday, tracking the rise in Brent crude oil prices, dealers said. Traders placed short bets ahead of the weekly gilt auction Friday to free up space in their portfolios for the fresh gilt supply, they said. Some traders also booked profit after bond prices rose Wednesday, dealers added. Rise in overnight indexed swap rates also weighed on bond prices.  

The 10-year benchmark 6.48%, 2035 bond ended at INR 97.19, down from INR 97.34 Wednesday. Bond prices rose nearly 50 paise Wednesday, prompting traders to book profits, dealers said. Its yield ended at 6.8884%, up from 6.8662% Wednesday. The turnover in the 10-year bond was INR 515.90 billion on Thursday, down from INR 669.90 billion turnover in the government securities market the previous day. The five-year swap rates closed at 5.37%, up from 5.32% Wednesday, as some foreign players paid fixed rates amid thin volume, according to dealers. 

The Brent crude oil prices for June delivery rose to around $96 per barrel at 1700 IST, slightly higher than $95.38 per barrel Wednesday at the end of Indian trading hours. Crude oil prices had eased below the key level of $100 per barrel following reports that both the US and Iran had in principle agreed to prolong a ceasefire, currently until Apr. 22.

"Currently, the prices are reacting to people (traders) positioning for auction and crude is up slightly," a dealer at a state-owned bank said. "There is not much clarity (in the geopolitical situation) for any significant move in prices. Crude (price) is hovering in a range."

Some traders and public sector banks purchased gilts as they considered the levels attractive, dealers said. Mutual funds and public sector banks also bought gilts as they have enough cash surplus, they added. The net liquidity absorbed by the Reserve Bank of India--a proxy for liquidity surplus--was INR 5.21 trillion Wednesday, slightly higher than INR 5.13 trillion Tuesday.

"These are good levels to buy. I do not think there is any reason to be bearish at these levels", a dealer at a private sector bank said. "Given that macroeconomic situations remain stable, yields (on 6.48%, 2035 bond) will ease from here."

However, insurers likely sold gilts to free up space in their portfolios as they are likely to pick up the 6.90%, 2065 bond at the weekly gilt auction Friday, dealers said. Mutual funds are expected to buy gilts at the auction after they aggressively bought T-bills at the auction Wednesday, dealers said. Traders considered 7.60% yield on the 40-year gilt attractive. The 40-year gilt yield rose to 7.60% only in November 2022. Demand for the 6.90%, 2065 gilt is also firm from insurers and provident funds as the Reserve Bank of India reduced the supply of long-term gilts in the borrowing calendar for Apr-Sept, dealers said. However, some traders will likely place bets at a higher yield as the reduced supply of these bonds is already factored in, they said.

The 6.36%, 2031 bond will be picked up by the public sector and private sector banks for their asset liability management portfolios, dealers said. Primary dealers are also likely to pick up these bonds as they expect short-term bond yields to rise, they added. Mutual funds are also likely to pick up the five-year bond at the auction, they said.

At the weekly gilt auction Friday, the government will sell INR 210 billion of 6.36%, 2031 bond and INR 110 billion of 6.90%, 2065 gilt. Traders had mixed views on the demand for both the bonds, dealers said. However, traders are expected to cover their short bets at the auction, dealers said. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 1139 IST showed trades worth INR 168.69 billion in the 6.33%, 2035 gilt, slightly up from INR 163.26 billion Wednesday.

On Monday, the government will switch INR-300-billion of nine source securities with eight destination securities. Tendering at the auction is likely to be firm as most of the banks have these papers 'in-the-money', or profitable, dealers said.

The government will switch 5.74%, 2026 bond with the erstwhile 10-year benchmark 6.33%, 2035 bond. Traders will seek to cover their short positions placed in the 6.33%, 2035 bond, dealers said. The spread between the 6.48%, 2035 bond and the 6.33%, 2035 bond is likely to narrow on Friday by 4-5 basis points, they added. The spread between the 6.33%, 2035 bond and the 6.48%, 2035 bond was narrowed after the RBI bought the erstwhile 10-year benchmark in its open market operations, dealers said.     

"Fundamentally, 6.33%, 2035 bond yields must have been higher than the current benchmark (6.48%, 2035 bond) due to liquidity premium, but due to OMOs (open market operations) in this paper the spreads had narrowed," a dealer at a primary dealership said.

There were no trades using the RBI's wholesale e-rupee pilot. The instrument has remained out of use since February.

OUTLOOK

On Friday, provided there is no change in the West Asia situation, bond prices will likely open steady ahead of the weekly gilt auction and will take cues from the result, dealers said. Bond prices will also take cues from overnight movement in Brent crude oil prices.

The government will sell INR 320 billion of gilts at the weekly auction Friday. Demand is likely to be firm, dealers said. Later in the day, the result will lend direction to the bond prices, dealers added. On Monday, the government will switch INR-300-billion of nine source securities with eight destination securities.

Traders expect the US-Iran ceasefire to hold, keeping the 10-year benchmark bond yield from climbing above 7.00%. That makes current levels attractive for bond buying. Traders are also watching US Treasury yields after President Donald Trump said he would have to fire Federal Reserve Chair Jerome Powell if he does not step down when his term ends next month.

Traders are divided on short-term, rate-sensitive bonds. Some favour them for their attractive yield spreads over overnight rates. Others are wary after RBI announced INR-2-trillion of seven-day variable rate reverse repo auction Thursday after market hours, which will drain liquidity from the system, dealers said. The auction will be held on Friday. 

The movement in overnight indexed swap rates and the rupee may also influence gilts. The yield on the 10-year benchmark 6.48%, 2035 gilt is seen at 6.80-7.00%.

End

US$1 = INR 93.1950

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

Edited by Deepshikha Bhardwaj

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