Amid global headwinds, domestic government bond yields have remained resilient, because of robust macroeconomic conditions and the positive impact of the inclusion of domestic bonds in JP Morgan’s emerging market (EM) bond index, market participants said.
Despite a 46 basis point rise in the 10-year benchmark US Treasury bond yield in September, the domestic benchmark bond yield rose by only 4 bps in the previous month. In the first week of October, the domestic benchmark bond yield remained flat, while the yield on the benchmark 10-year US Treasury note surged by 17 bps.
The significant rise in US Treasury yields was based on the view that the US Federal Reserve might keep the rates higher for an extended period. The US rate-setting panel is expected to raise the funds rate by 25 basis points in the current calendar year.
“Domestic yields are not faltering much because we have strong macroeconomic conditions, that is, benign inflation, reasonable growth and also the expectations of active and passive inflows due to the inclusion of our bonds in the global index, keeping the bond yields stable,” V.R.C. Reddy, head of treasury at Karur Vysya Bank said.
JP Morgan announced the inclusion of India in its widely followed emerging market bond index on September 22. JP Morgan has included India in its flagship index GBI-EM Global Diversified Index. Market participants expect that more indices might include India following JP Morgan’s decision.
Food inflation, previously a concern for the RBI in its efforts to curb and regulate headline inflation, has now subsided. The consumer price index-based inflation eased to 6.83 per cent in August, from a 15-month high of 7.44 per cent in July, mainly due to a decline in the rate of the rise in vegetable prices.
Market participants said that the lower net supply in the second half of the current financial year is also a positive cue. The net supply is relatively lower in the latter half of FY24 with Rs 2.8 trillion worth of redemptions, out of which Rs 2.2 trillion worth of bonds will mature in the Oct-Dec quarter. The government plans to borrow Rs 6.6 trillion in H2, against Rs 8.5 trillion in H1.
“Our yields have been much more stable than other global markets because of the bond index inclusion. The supply-related pressures in our bond markets are also lower in the second half of the current FY. We feel that the domestic yields will be lower by the end of the financial year than where they are right now,” Vijay Sharma, Senior Executive Vice President at PNB Gilts said.
The yield on the benchmark 10-year government bond is expected to trade in a narrow range in the current quarter.
“Yield curve inversion in the US is under question. People feel that the inverted curve cannot sustain if the Fed is hiking and planning to keep it higher for a long time. Our curve is still somewhat positive,” Naveen Singh, head of trading & EVP at ICICI Securities Primary Dealership said.