Short-term bond yields may fall after March 31 as liquidity eases: Experts

Short-term yields are set to come down on the back of improving liquidity

Yields on short-term bonds may fall starting April as liquidity in the banking system improves, debt fund managers told Moneycontrol.

Short-term yields are expected to ease post March 31 as the seasonality of the banking system to raise deposits crossing the fiscal year is expected to abate, said Vikrant Mehta, head of fixed income at ITI Mutual Fund.

A fund manager, on the condition of anonymity, said that liquidity typically tightens until the end of March as banks tend to present higher deposits on their books before the year-end. However, banks move back from actively seeking deposits after accounts are settled.

“Another reason for the increase in liquidity is that government tends to spend a significant chunk of their total expenditure in the initial months of the financial year,” said Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India).

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“Going forward, we don’t expect short-term bond yields to move up further and will remain in the same range. We expect liquidity conditions to ease starting April after which it may ease short term rates,” said Abhishek Bisen, Fund Manager, Fixed Income at Kotak Mahindra AMC.

Flattening curve

The yield curve had been flattening since February, and in the first week of March, it was seen inverting.

The 10-year benchmark bond yield fell to 7.098 percent on March 19 while the 3-year bond yield was at 7.084 percent on the same day.

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A flat yield curve is when short-term bond yields are similar to that of long-term bond yields. Ideally, bonds with a longer tenure should command a higher yield than bonds with a short tenure.

In the current scenario, flattening of yield curve reflects the tight liquidity in the banking system which is affecting short-term bond yields.

As per experts, in the last few months, liquidity in the banking system has remained tight even after support by the Reserve Bank of India (RBI). This pushed short-term rates higher.

On the other hand, the yield on long-term bonds fell sharply on the back of the huge demand seen from domestic as well as foreign investors.

"Amongst other factors, the long-term bond yields are also coming down because of increased demand from global investors after JP Morgan announced the inclusion of Indian sovereign bonds in its global emerging market bond index in September last year,” said Mehta.

Jajoo said that demand from pension funds for long-term bonds remains intact which is bringing down the long-term bond yields.

The expectation of a rate cut is already factored in and is reflected in the long-term bond yields. The yield curve could steepen once the rate cut happens around August, said Bisen.

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