Bond yields to trade at 6.75-6.90% in the near term; will it sustain at these levels?

Bond yields to trade at 6.75-6.90% in the near term; will it sustain at these levels?

The benchmark bond yield is expected to trade at between 6.75-6.90 percent in the coming days due to international and domestic cues, but the sustainability of these levels will depend on upcoming data, experts said.

The yield on the benchmark bond has fallen sharply over the past few weeks due to the decline in Brent crude oil prices and easing US Treasury yields, along with the Reserve Bank of India’s (RBI) pause on increasing interest rates.

“Yields could fall to 6.75 percent levels, but a lot would depend on upcoming data. We expect yields to fall further, but do not have a hard target or timeline,” said Sandeep Yadav, head of fixed income at DSP Mutual Fund.

“Robust domestic demand for the far end of the yield curve seems to be supporting markets well until May 2023 as net G-Sec supply remains muted,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

A drop in the yield to 6.75 percent levels from 7.03 percent currently would mean the Indian market expects the central bank to cut the key interest rate in the June monetary policy, just as a pause is expected in the next policy by the US Federal Reserve.

The Fed increased interest rates by a quarter percentage point last week to defeat higher inflationary pressure, which kept price rises above the 2 percent target. The RBI refrained from hiking rates in the April monetary policy after cumulative hikes of 250 basis points since May 2022.

Some experts said the yield will fall to 6.90 percent levels. HDFC Bank, in its India Outlook FY24 report, said it expects the benchmark 10-year bond yield at between 6.80 percent and 7 percent in FY24.

Bhardwaj said that the markets have priced in the global monetary tightening cycle on its last leg with expectations of rate cuts subsequently, there is an upside risk to global yields amid a slower deceleration in core inflation and delayed rate cuts.

Also read: Roaring multi-asset mutual funds bet on these midcap stocks. Do you own any?

Yield movement

The yield on the benchmark bond has fallen just over 27 basis points (bps) due to factors such as easing Brent crude oil prices and the RBI’s rate pause, which improved sentiment in the market.

The benchmark 7.26 percent 2033 bond yield, which traded at 7.3056 percent on April 3, declined to 7.2032 percent on April 6, after the monetary policy. Further, after Brent crude oil prices eased, the yield on this paper fell to 7.0338 percent on May 8 from 7.1126 percent on April 26.

The yield on the old benchmark 7.26 percent 2032 bond eased 23 bps. It fell to 7.0836 percent on May 8 from 7.3142 percent on April 3. One basis point is one-hundredth of a percentage point.

Bond dealers said the market will remain volatile in the coming days unless any surprising negative arises. Further, increasing the net supply from June is expected to again begin weighing on market sentiment.

Yadav of DSP Mutual said tighter liquidity may prompt open market operations by the RBI, but this looks unlikely for now since the central bank’s dividend and the liquidity cyclicity may keep a lid on how tight it may get.

Further, Ashish Ranawade, Head of Product, Emkay Wealth Management said with the interbank liquidity at marginally positive or marginally negative levels, the massive government borrowing program especially at the long end will have an enduring impact on the yields.

Also read: Banking Central | Bank credit picks up momentum. But where is the money going?

Oil relief

Easing Brent crude oil prices have given relief to bond investors as it softens inflationary pressure in India. Brent crude oil prices have fallen due to concerns over the US economy and weak demand in China. However, they rose on May 8 as fears of a recession started fading.

According to Bloomberg data, Brent crude oil prices fell to $76.02 per barrel on May 8 from $84.93 per barrel on April 3. Currently, it is trading at $76.52 per barrel.

Crude prices rose in April after the Organisation of Petroleum Exporting Countries and its allies (OPEC+) decided to cut production by 1.16 million barrels per day in addition to earlier cuts.