Banks likely to report treasury losses in Q2 as bond yields harden

The benchmark 10-year government bond yield hardened by 42 basis points during the quarter, while the five-year bond yield rose by 43 basis points to 6.85 per cent

Banks are set to report treasury losses in the second quarter of 2026-27 (FY27) as bond yields hardened across the curve, leading to mark-to-market (MTM) losses on their investment books, said market participants.

 

The yield on the benchmark 10-year government bond hardened by 43.8 basis points (bps) during the quarter, while that on the 5-year bond rose by 46.8 bps to 6.89 per cent. The 10-year yield closed at 7.19 per cent on September 30, after rising 22 bps in September alone, its highest level since April 2024. The rise more than reversed the fall of around 32 bps in the first quarter.

 

The yield on the 7-year bond, and 15-year bond rose by 50 bps, and 40 bps respectively in Q2FY27. 

 

Yields rose as a global bond sell-off, higher crude oil prices and a weaker rupee weighed on the domestic market. Global bonds closed out September with their worst month in years, with the US 10-year Treasury yield rising to 5.34 per cent, its highest level since 2002. Brent crude climbed back above $100 a barrel, having fallen to pre Iran-US war levels in the first quarter, which revived concerns over imported inflation. 

 

The yield on the benchmark 10-year government bond crossed 7 per cent on September 11, driven by the surge in crude oil prices, the global bond sell-off, and the expectation of a rate hike by the Reserve Bank of India’s (RBI's) Monetary Policy Committee.  

 

“The rise in yields should lead to mark to market losses for the banks,” said the treasury head at a private bank. “Yields hardened by over 40 bps during the quarter, and lenders with larger available-for-sale (AFS) portfolios will feel the impact more. A large part of the gains booked in the first quarter could get offset,” the person added. 

 

Persistent selling by foreign portfolio investors in debt and equity and the depreciation of the rupee, which prompted the RBI to sell dollars in the foreign exchange market, added to the pressure. India’s forex reserves fell by a record $18.3 billion in the week ended September 25.

 

Domestic factors also weighed on sentiment. Retail inflation rose to 4.82 per cent in August, and investors stayed cautious ahead of the RBI’s policy decision due on October 7, while a looming debt sale added supply pressure.

 

When yields rise, bond prices fall, forcing banks to mark down securities held in their AFS and trading portfolios, which results in MTM losses. Lenders with larger AFS and fair value through other comprehensive income portfolios are expected to be hit harder, while securities held under the held-to-maturity category are not marked to market.

 

“The pressure is not over yet, since yields rose further after the quarter ended, and the RBI's policy decision on October 7 will set the direction for the third quarter,” said a dealer at a primary dealership.