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Informist, Monday, Jul. 6, 2026

 

By Cassandra Carvalho

 

MUMBAI – Foreign portfolio investors' purchases pulled the yield spread between the 15-year and 10-year benchmark government bonds to over a year's low on Jul. 1, while longer-term bond yield spreads over the 10-year fell to over a six-week low last week. This has led to FPIs and domestic investors booking profits in the past few days after the spread compression, though some see scope for spreads to narrow further, dealers said.

The yield spread of the 15-year benchmark 6.68%, 2040 bond over the benchmark 10-year 6.94%, 2036 gilt hit 21 bps Wednesday, the lowest since Jun. 5, 2025. Till Wednesday, FPIs had net bought INR 76.79 billion of FAR bonds maturing in 15 years and more since Jun. 4--the day before the Centre removed tax on their bond buys. This data excludes green bonds. These investors sold nearly INR 25 billion of the 15-year bond by Friday and raised their holdings in the 10-year benchmark by about INR 32 billion, as per data from Clearing Corp. of India.

 

"There has been increased activity from offshore on 15-year and longer-tenure bonds, which is to be expected after the inclusion in FAR (Fully Accessible Route)," a dealer at a foreign bank said. "We didn't have a strong view, but when spreads compressed by 6-7 basis points the market took note and has tried to play the spread. It (profit taking) doesn't look like a significant move yet."

 

The RBI added the 15-year gilt, the 30-year benchmark 7.24%, 2055 bond and the 40-year 7.71%, 2066 bond to the fully accessible route in June in a bid to attract FPI inflows. India's FAR bonds--which have no statutory limit for foreign ownership--are currently included in the emerging market bond indices of JPMorgan, Bloomberg and FTSE Russell. Some of the purchases of these bonds were due to passive investors rebalancing their portfolios before the month-end, when the indices reflected the addition of these bonds, dealers said.

 

Last week, the spread of the 7.24%, 2055 bond over the 10-year yield had hit its lowest since May 8. This widened by about 4 bps until Friday even as FPIs' holdings in the bond rose marginally, as domestic mutual funds and insurers booked profits.

 

The Centre's removal of capital gains tax and withholding tax on FPIs' bond buys has also aided foreign interest in the longer-end of India's bond yield curve. A tumble in oil prices to levels seen before the West Asia war has also renewed risk appetite from domestic investors for longer-tenure bonds. Some mutual funds continue to pick up gilts maturing in 30 to 50 years. The share of their supply in Oct-Mar seen similar to Apr-Sept, at 25% of the borrowing calendar, a steep decline from FY26. 

 

"My take is that there should be spread compression between the 10-year and the 30-40-year (government bond yields). That view remains intact. We've already seen 5-7 bps of spread compression (in the last two weeks of June), and that should continue going forward as well," the head of fixed income investment at an asset management company said. 

 

While short-term bonds were the first to earn FPI interest, long-term bonds gained more in the second-half of June close to the rebalancing and with short-term yields falling sharply. Some expect FPIs' interest in these tenures to taper off, with global long-term bonds largely underperforming short tenures. Traders also expect short-term bonds to be in favour again, once inflows into foreign currency non-resident dollar-denominated bank deposits materialise. This would lead to the yield curve steepening.

 

"FPIs are also trying to rally the longer-end," a dealer at an insurance company said. "I'm seeing overall yield curve movement to be across the curve, not one specific pocket; the timing of the movement may wary. Recently, more or less the spreads have balanced out. It is likely that again, the longer-end will start going up first and later, the shorter-end of the curve will follow, and that's where the overall steepening will be higher."

 

Attention is currently on the belly of the curve--bonds maturing in seven to 13 years--with scope for yields to fall after other tenures have recently outperformed. Albeit, if the 10-year benchmark sustains a fall below the key 6.70% yield, this could translate to a larger fall in long-term bond yields, some dealers said.  End

 

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

 

With inputs from Aaryan Khanna

Edited by Deepshikha Bhardwaj

 

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