Investors opt for bonds with longer tenure

Spurred by rate cut hope also, new 10-year benchmark seen in April

Rate cut expectations and the expected auction of a new 10-year benchmark government bond in a few months has resulted in buyer interest in longer tenure government paper.

The 8.20 per cent 2025 and 8.33 per cent 2026 bonds have witnessed a rise in trading volumes, as the Street expects the yield on these two gilts to fall more as compared to the 10-year benchmark 8.15 per cent 2022.

Typically, the 10-year benchmark gilt has the highest trading volumes. Now, there is a change in the tend. Data from Clearing Corporation of India shows that in the past month, the trading volume of the 8.33 per cent 2026 gilt was higher than the trading volume of the 8.15 per cent 2022 gilt in nine of 23 trading sessions. On December 28, the trading volume was highest in the 8.20 per cent 2025 gilt.

“The yields on the papers maturing in 2025 and in 2026 are pretty attractive and there is scope for further softening. There is more profitability that can be achieved in these two gilts. The yields on these two will fall more,” said S Srinivasaraghavan, executive vice-president and head-treasury at Dhanlaxmi Bank. He expects these two to run for more time than the 10-year benchmark because after February-March, a new 10-year gilt will be introduced.

According to estimates by treasury head of banks, the fall in the yields of these two gilts will be about two basis points more than the fall

in the yield of the 10-year benchmark gilt 8.15 per cent 2022 as we get closer to January 29, when the Reserve Bank of India (RBI) will detail its third-quarter monetary policy review.

The yield on the 10-year benchmark gilt closed at 7.88 per cent on Thursday, compared with the previous close of 7.90 per cent. That on the 8.20 per cent 2025 gilt ended at 7.93 per cent, compared with a previous close of 7.95 per cent, and the yield on the 8.33 per cent 2026 gilt closed at 7.95 per cent, compared with yesterday’s close of 7.97 per cent. The yield on these three fell 30-32 bps in the past month.

Overall trading volumes in the past month have also gone up. “The trading volumes will be sustained going into the policy and beyond that, we need to see the monetary policy,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank. The market has already factored in a 25 bps cut in the repo rate by RBI on January 29. However, before the review, two crucial data points — the Index of Industrial Production and the Wholesale Price Index (WPI) inflation — are expected, which would guide RBI’s decision.

If the WPI inflation for December is close to seven per cent, the Street might start expecting a 50 bps cut in the repo rate. This would result in the 10-year benchmark gilt yield falling to 7.75 per cent. However, according to treasury heads of banks, this level might not sustain for a long time.