G-sec yield drops by 254 bps

In line with the fall in inflation and interest rates, the yield on 10-year government bonds declined by 254 basis points in 2008 to close a tad below 5.25 per cent. This is biggest fall since 2001.

The yield on the 10-year paper was 5.27 per cent at close of trade yesterday and had ended 2007 at 7.79 per cent.

The yield is expected to fall further in early 2009 as central banks across the world continue to slash interest rates to boost demand and revive the economy. The 10-year paper may see yield dipping below five per cent mark, bankers said.

Yield has come down as the Reserve Bank of India has slashed interest rates to offset the impact of the global credit crunch and economic slowdown. The market expects more rate cuts in the coming months, while will accelerate the fall in yield.

The fall in yields, as there is an inverse relationship with price, will help banks offset a part of the losses caused to a rise in provisioning due to higher delinquencies.

State Bank of India treasury executives said the bias for a softer interest rate regime will continue till the middle of next year and yield will fall correspondingly.

Pointing to surge in bond trading activity in fourth quarter of 2008, CARE deputy managing director D R Dogra said bond yields have moved southwards as banks, especially the private sector players, are accumulating bonds driven by combination of factors.

Private sector banks have been wary of lending due to the liquidity crunch as also due to the fear of higher delinquency. They have invested in government securities much more than the minimum prescribed level.

On Wednesday, government bonds ended up but gave up most intraday gains because sentiment was hit after reports dashed expectations of sharp rate cuts from RBI, dealers said. At the end of the day, the paper settled at Rs 121.79 or 5.2491 per cent, compared with Rs 121.63 or 5.2694 per cent.