Banks set to gain as bond yields soften 14 basis points in a quarter

Commercial banks are poised to make trading gains as the yield on the benchmark 10-year government bond fell by 14 basis points (bps) in the January-March quarter to settle at 7.06 per cent on the last trading day of the fourth quarter.

Yields on the other two most traded securities also declined. The yield on the five-year government bond fell by 8 bps, whereas that on the 14-year bond fell by 23 bps during the quarter.

For the full financial year too, bond yields declined for the first time in the past four financial years. The benchmark yield fell by 26 bps over 2023-24 (FY24), against an uptick of 48 bps in 2022-23. The last instance of yield decline was in 2019-20, with a notable decrease of 121 bps.

The yield rose by 3 bps and 67 bps in 2020-21 and 2021-22, respectively.

Market participants said that the yields fell in FY24 on the back of foreign inflows and favourable demand-supply dynamics over the year.

In the final quarter of the financial year, liquidity conditions improved in the banking system, and foreign inflows bolstered the debt market, while the US Federal Reserve Committee hinted at three rate cuts in 2024. These factors lifted sentiment in the bond market.

“There would be some treasury gains. What will also be beneficial for banks is that mark-to-market has improved compared to December 31. So the provisioning that we had made, there would be a write-back this quarter. So that is the big advantage I see,” said a treasury head at a private bank.

The liquidity deficit in the system stood at Rs 40,981 crore on Wednesday, against Rs 1.56 trillion on December 31, 2023, according to data by the central bank.

The Reserve Bank of India conducted a slew of variable rate repo auctions to infuse liquidity and keep overnight money market rates near the repo rate. The repo rate currently stands at 6.5 per cent.

Moreover, there was a surge in early-stage capital inflows within the debt segment from foreign portfolio investors (FPIs) during the quarter ahead of the inclusion of Indian bonds in the JPMorgan index starting June 2024.

Foreign investors infused Rs 53,051 crore in the debt market during the quarter as of March 26, according to data from the National Securities Depository.

“The yields fell because essentially one is liquidity. The flows from FPIs have consistently been at a very high level. So there has been buying all around and the reason for that is also stability in the dollar-rupee,” said Vikas Goel, managing director, and chief executive officer at PNB Gilts.

“And now the newest addition is the borrowing programme, which surprised everybody with how low it is,” he added.

The yield on the benchmark bond fell on Thursday after the release of the borrowing calendar for the first half (April-September) of the upcoming financial year (2024-25, or FY25). The central government plans to borrow 53.07 per cent of its full-year borrowing target of Rs 14.13 trillion for FY25, which was lower than market expectations. The market was expecting around 58 per cent of the total borrowing in the initial half.

The yields had also slumped in February post-lower-than-expected fiscal deficit target set by Finance Minister Nirmala Sitharaman for FY25 during her Interim Budget speech. The government has pegged the fiscal deficit target at 5.1 per cent of gross domestic product, against the market expectation of 5.3-5.4 per cent.