With the government's plan of issuing heavy debt bonds and the prospects of the US Federal Reserve interest rate pause may impact recent rallies of Indian sovereign bonds. According to a Bloomberg report, the rally in India's sovereign bonds may end soon.
The report noted that the yield on 10-year sovereign bonds fell below 7 per cent on Thursday, the first time since April 2022. This was due to lower crude oil prices and the possibility that the US Federal Reserve would pause its rate increases.
However, the bond prices might stop going up soon because the government is planning to sell more bonds in the coming months, and there are no immediate plans to lower interest rates, the report said adding that traders are shifting their focus on upcoming heavy debt issuances, which up until was focused on the positive impact of the RBI pausing its rate hikes.
“Markets have moved from 7.45 per cent to 7 per cent and with heavy supply in duration, I would not be very aggressive at this point on the benchmark note from a trading perspective. Positioning in 3-5 years would be better.” Harsimran Singh Sahni, head of treasury at Anand Rathi Global Finance told Bloomberg.
A government bond is a debt instrument issued by the Central and State Governments to raise funds for infrastructure development during a liquidity crisis. It guarantees interest earnings and principal repayment to investors on a specific date. The 10-year bond yield is the most talked about government security as it serves as a benchmark for other borrowing rates, including mortgage rates. Its movements are closely watched by investors because fluctuations can have a significant impact on the financial landscape.
The Bloomberg report noted that last week, the benchmark yield fell 11 basis points, following the biggest monthly decline since 2020. This was due to the RBI choosing to pause its policy in April, which surprised traders. However, there are already signs of weakened demand as the government sold bonds at higher-than-anticipated cut-off yields during an auction on Thursday. When benchmark rates are not decreasing significantly, shorter-tenor securities tend to provide better returns than longer ones.
Govt Plan Of Bond Issuances
The government is planning to sell bonds worth Rs 9 trillion ($110 billion) in the next six months until September, which accounts for 58 per cent of its full-year target of Rs 15.43 trillion. However, according to the report, the large supply may face challenges from buyers, particularly after the recent rally and with banks holding bonds beyond their regulatory limits.
“I don’t expect much demand coming from the banking sector,” said Deepak Sood, partner, and head of fixed income at Alpha Alternatives Fund in Mumbai told Bloomberg, adding that Credit demand has been robust and expectations for the RBI to conduct open market operations to support the bond market are low.
Inflation can have a significant impact on bonds. When inflation rises, the purchasing power of the bond's fixed interest payments decreases, making them less valuable. This can cause bond prices to fall and yields to rise, as investors demand higher yields to compensate for the eroding value of their fixed payments.
According to a Bloomberg survey, April Inflation Data on Friday is expected to decline 4.8 per cent from 5.66 per cent in March.