Govt bond yields soften on better-than-expected cut-offs on SDLs

Government bond yields fell on Tuesday after better-than-expected cutoff at the weekly state bonds auction, said dealers. While cutoff yield on shorter maturities was slightly higher than expected, stronger results at the long end and the absence of a large tail eased supply concerns and helped the market recover later in the day.

 

The yield on the benchmark 10-year government bond settled at 6.61 per cent, against the previous close of 6.64 per cent.

 

“It was mixed. On the longer end, over 15 years, all the cutoffs were better than expectations, but up to 10 years, they were a little on the higher side. Overall, it’s a mixed cutoff, but supply got absorbed without much damage, which the market has taken as a relief,” said a dealer at a primary dealership. 

 

The cutoff yield on 10-year state bonds was set in a range of 7.53 per cent to 7.57 per cent. States and Union Territories plan to borrow up to ₹4.99 trillion through state government securities in the fourth quarter of 2025-26 (Q4FY26). The borrowing amount was on the higher end of expectations. The planned issuance is higher than the ₹4.73 trillion seen in the corresponding quarter of FY25.

 

The yield spread between 10-year SDL (state development loan) and 10-year government bond currently stands between 92 basis points (bps) and 96 bps.

 

Market participants said the Reserve Bank of India (RBI) may consider including SDLs in its OMO (open market operation) purchase auctions if spreads widen beyond 100 bps. However, the RBI governor had clarified in the December post-policy press conference that OMO purchases are intended purely as a liquidity tool and not for managing yields.

 

“They have done OMOs in SDLs in the past, especially during the Covid period, so the option is there if spreads continue to widen,” said a market participant. “While the governor has denied it, we might expect some reconsideration if the spread widens beyond 100 bps,” the person added.

 

Meanwhile, the RBI released the list of securities for the upcoming OMO auction worth ₹50,000 crore on January 12. Market participants said the securities announced in the latest OMO calendar were well chosen, as they largely comprised on-the-run papers that are widely held in banks’ and dealers’ trading books. With most of these securities already in portfolios, participants expect healthy tendering and smooth pass-through of the auction, aiding effective liquidity infusion.

 

The net liquidity in the banking system was in a surplus of ₹64,812 crore on Monday, latest RBI data showed.