Govt bond yields unlikely to fall further in Q4 despite recent softening

Despite easing after the policy review, government bond yields are expected to stay elevated in Q4 as supply pressure persists, debt switches offer limited relief and liquidity support appears unlikel

Even if yields on government bonds softened since the February monetary policy review meeting, they may still remain elevated through the final quarter of the current financial year, as bond switches have offered little respite to the market. Persistent supply pressure has weighed on market sentiment, keeping traders cautious.

 

The Government of India conducted a conversion/switch operation on February 12 with the Reserve Bank of India (RBI) to smoothen its liability profile. As part of the transaction, the government bought back four securities aggregating over ₹75,500 crore in face value.

 

The yield on the benchmark 10-year government bond has eased by about 11 basis points from its post-Budget peak of 6.77 per cent. However, with the rate-cut cycle seen as largely over and further liquidity infusions unlikely, market participants expect the benchmark government bond yield to remain above 6.60 per cent through the end of the quarter. Dealers said the yield on the benchmark 10-year government bond could edge higher, potentially moving closer to 7 per cent, once fresh supply begins in April.

 

The yield on the benchmark 10-year government bond settled at 6.66 per cent on Monday, against the previous close of 6.68 per cent.

 

“In terms of net borrowing, nothing materially changes; the demand-supply dynamics remain the same as before. So while sentiment is marginally positive, it does not alter the overall market outlook. Yields are likely to remain elevated. In the near term, the 10-year benchmark is seen in the 6.60 per cent–6.75 per cent range, and technically it looks highly unlikely to sustain below 6.65 per cent,” said a dealer at a private bank.

 

Net market borrowing, after accounting for scheduled repayments, is estimated at around ₹11.7 trillion for the upcoming financial year (FY27).

 

Despite the implementation of a significant debt switch, exchanging shorter-dated papers for longer-dated government securities, yields on the benchmark bond failed to ease below the psychologically crucial 6.60 per cent mark, with early declines around the switch announcement quickly reversed due to profit booking.

 

The next policy action is seen more likely to be a rate increase as and when inflation numbers rise, depending on prevailing conditions.

 

“It is unlikely the yields will fall further as the rate-cut cycle is now over and more liquidity support is not expected. The net borrowing amount remains the same,” said a dealer at a primary dealership.

 

“At this stage, the only relief could come from buyback auctions. That said, the effectiveness will depend on the size, timing and the specific securities chosen; until there is clarity on that, the impact is likely to remain limited,” the person added.