Bond yields slip to 13-month low

Yield on the Indian 10-year benchmark government bond slid 8 basis points to close at 7.01%, the lowest closing level since April 7 last year, Bloomberg data showed. Bond prices and yields move in opposite directions.

“The (US) banking system developments over the past weekend and the panic in equity markets may restart the debate about separating monetary policy from financial stability policy – something that dominated the March review as well, which led to a lower hike of 25bps than expected pre-SVB (Silicon Valley Bank),” said Madhavi Arora, lead economist, Emkay Global Financial Services.

“Currently, markets expect nearly a 90bp cut by Jan’24, starting as early Sep’23, which looks difficult to fathom,” she said.

The immediate trigger for the sharp fall in domestic bond yields was a plunge in US Treasury yields following the latest bout of financial instability in the country – the takeover of the beleaguered First Republic Bank.

Yield on the 10-year US Treasury note nosedived 14 basis points Tuesday on mounting concerns over the stability of the US economy, shortening the odds the Fed will soon call an end to rate hikes. Risk aversion also drove investors to the safety of American government debt.

Lower sovereign bond yields bring down the cost of borrowing for corporate entities as government debt is used as a benchmark for pricing.A fall in US bond yields increases the appeal of higher-yielding fixed-income assets in emerging markets like India.

DOMESTIC DRIVERS
While the swings in the US bond market spilled over into the Indian debt market, traders said that there were local factors in favour of domestic bonds too. Future expectations of yields indicate the same.

The key catalyst for the newfound confidence in bonds is the market’s belief that the RBI is done with raising interest rates. The view stems from recent sharp declines in inflation, stability in the domestic currency and the aggressive rate hikes already carried out by the RBI.

It was in April 2022 that yield on the 10-year bond had climbed past the 7% mark after a long hiatus as the Reserve Bank of India took the first steps toward a monetary tightening cycle that saw six consecutive rate hikes from May to February.

“The new range that the market is looking at is 6.90-7.15% for the 10-year bond,” said Naveen Singh, head of trading, ICICI Securities Primary Dealership.

“The RBI said it’s not a pivot but unless we have significant inflation shocks, the market does not expect any more hikes. We are seeing real buying interest at these levels – it’s not just a one-off. That suggests that the view on the direction of policy has improved,” he said.