Domestic bond yield remains resilient, up only 4 bps amid global challenges

The significant rise in US Treasury yields was based on the view that the US Federal Reserve might keep the rates higher for an extended period

Amid global headwinds, domestic government bond yields have remained resilient due to robust macroeconomic conditions and the positive impact of the inclusion of domestic bonds in JP Morgan’s Emerging Market (EM) Bond Index, as noted by market participants.

Notwithstanding a 46-basis point (bp) rise in the 10-year benchmark US Treasury bond yield in September, the domestic benchmark bond yield only increased by 4 bps in the previous month.

In the first week of October, the domestic benchmark bond yield remained flat, while the yield on the benchmark 10-year US Treasury note surged by 17 bps.

The significant rise in US Treasury yields was attributed to the belief that the US Federal Reserve (Fed) might maintain higher rates for an extended period. The US rate-setting panel is expected to raise the funds rate by 25 bps in the current calendar year.

“Domestic yields are not faltering much because we have strong macroeconomic conditions, including benign inflation, reasonable growth, and expectations of active and passive inflows due to the inclusion of our bonds in global indices, which is helping to keep bond yields stable,” said V R C Reddy, head of Treasury at Karur Vysya Bank.

On September 22, JP Morgan announced the inclusion of India in its widely followed EM bond index, the Government Bond Index-EMs Global Diversified Index.

Market participants anticipate that more indices may include India following JP Morgan’s decision.

Also read: Government bond yields surge, tracking the rise in US Treasury yields

Food inflation, previously a concern for the Reserve Bank of India in its efforts to curb and regulate headline inflation, has now subsided.

The Consumer Price Index-based inflation rate eased to 6.83 per cent in August, down from a 15-month high of 7.44 per cent in July, primarily due to a decline in the rate of increase in vegetable prices.

Market participants also noted that lower net supply in the second half of the current financial year (2023-24, or Fy24) is a positive signal. The net supply is relatively lower in the latter half of FY24, with Rs 2.8 trillion worth of redemptions, of which Rs 2.2 trillion worth of bonds will mature in the October-December quarter.

The government plans to borrow Rs 6.6 trillion in the second half (H2), compared to Rs 8.5 trillion in the first half.

“Our yields have been much more stable than in other global markets because of the bond index inclusion. Supply-related pressures in our bond markets are also lower in H2FY24. We anticipate that domestic yields will be lower by the end of the financial year compared to their current levels,” said Vijay Sharma, senior executive vice-president (EVP) at PNB Gilts.

The yield on the benchmark 10-year government bond is expected to trade in a narrow range in the current quarter.

“Yield curve inversion in the US is under scrutiny. People believe that the inverted curve cannot be sustained if the Fed continues to hike rates and keeps them higher for an extended period. Our curve is still somewhat positive,” remarked Naveen Singh, head of trading and EVP at ICICI Securities Primary Dealership.