![Short-term bonds may outperform long-term bonds as liquidity seen improving 1 bs logo](https://thespuzz.s3.ap-south-1.amazonaws.com/thespuzz/uploads/2022/08/05041910/bs-logo.jpg)
Illustration: Ajay Mohanty
Short-term government bonds are expected to outperform long-term bonds in the near term due to an improvement in liquidity in the banking system, according to market participants.
The yield spread between the 5-year government bond and the benchmark 10-year government bond currently stands at 3 basis points, which is expected to widen to around 10 basis points by the end of June, they said.
“Short-term bonds with tenures up to 3-5 years will really outperform the 10-year duration, and what we call bull steepening will be at play,” said Vikas Goel, managing director and chief executive officer, PNB Gilts. “While the 10-year yield might fall by 3-4 basis points, and it has already fallen by 4 basis points, short-term yields will fall another 10 basis points by the end of June,” he added.
The benchmark 10-year government bond yield settled at 7 per cent on Friday. The five-year bond yield settled at 7.03 per cent.
“The yield on the 5-year bond is higher than the 10-year bond, which basically indicates an inversion of the yield curve. As liquidity is seen improving, money market rates might fall to 6.50 per cent, which will lead to some yield softening in short-term bonds,” said a dealer at a state-owned bank.
Liquidity is expected to improve significantly after the Reserve Bank of India’s record surplus transfer to the government. The RBI approved a dividend of Rs 2.11 trillion for the central government for the financial year 2023-24, marking an increase of approximately 141 per cent from the financial year 2022-23.
Liquidity in the banking system was in a deficit of Rs 2.3 trillion on Thursday, according to the latest data by the central bank.
The RBI also revised the calendar for Treasury bills, which is further expected to aid liquidity. The updated schedule for the period from May 22 to June 26 of the current year includes a reduction of Rs 60,000 crore in the issuance of Treasury bills.
First Published: May 26 2024 | 4:28 PM IST