Government Securities: Rate cuts bring investors to g-secs, flatten yield curve

Mumbai: Longer tenure government bonds maturing in 35 to 40 years have been in demand in the past three sessions as yields on these instruments, mirroring those on shorter time periods, are expected to fall more than 10 basis points, market participants said.

Bonds maturing by 2030 have already softened by over 25 basis point beginning of this fiscal year in hope of more rate cuts as inflation has eased, contributing to a significant flattening of the yield curve.

The 40-year 2064 bond ended at 6.78% on Wednesday, seven basis points lower from the start of this fiscal. Similarly, the 3-year bond maturing in 2028 closed at 6.04%, 28 basis points lower from April 2. Traders earlier expected benchmark 10-year yield to soften to 6.30% by July-August, but the pace at which yields have softened has taken them by surprise.

The 10-year government security closed at 6.33% and is expected to touch 6.25% by the next fortnight. The softening in the yields follows lowering of policy rate by 50 basis points to 6% since February, changed stance to accommodative, injected ₹6.5 lakh crore and signalled further rate cuts to support growth

“Because the 10-year yield has been coming off so sharply, investors who have been feeling the ‘fear of missing out’ are chasing the longer-tenure bonds where they still see relative value in terms of spreads,” said Rahul Bhuskute, chief investment officer at Bharti AXA. “While we too had expected the yield curve to shift lower, what has happened in the last month is above our expectation. With low crude prices and dollar index, along with lower inflation prints for India, perhaps it’s a kind of goldilocks for central bank to cut rates. The only small concern is what if some of the conditions turn,” Bhuskute said.