The yield on Treasury bills and government bonds has been on a downtrend in recent weeks as the prospect of another repo rate hike by the Reserve Bank of India (RBI) declines. The indicative yield on T-bills and bonds for next week's auction reaffirms this trend.
RBI has declared the indicative yield of T-bills for three months, six months, and 364 days at 6.72 per cent, 6.85 per cent, and 6.87 per cent, respectively, a further drop from last week.
Besides, 12 states will participate in the weekly state government bond auction. These are Gujarat, Assam, Andhra Pradesh, Chhattisgarh, Rajasthan, Punjab, Tamil Nadu, Telangana, Kerala, Jammu and Kashmir, and Himachal Pradesh. Andhra Pradesh is offering the highest interest rate of 7.40 per cent for its bond maturing in 2042.
Like Treasury bills, the state development loan yields (SDLs) have also declined. Venkatakrishnan Srinivasan, the founder of Rockfort Fincap LLP, says, "The government bond market has ended flat this week with the expectation of one more repo rate pause from MPC (monetary policy committee). Traders expect the MPC to change its stance from withdrawing accommodation while being cautious about external factors and inflation."
The Bond Market
The bond curve is expected to steepen further as the 10-year bond yield slowly increases due to supply factors. Srinivasan adds that during May, the corporate bond primary issuances saw a massive jump as AAA credit-rated government-owned undertakings preferred a slight shift from the banks' term loan to the bond market, considering the huge difference in rates. However, he says the AAA-rated PSU bond yield curve is expected to stay flat until supply increases.
Due to RBI's MPC meeting, the corporate bond primary issuance supply may be muted next week. The AT1 bond issuances are likely to commence soon as many banks have taken board approvals to raise capital. In addition, the Securities and Exchange Board of India (Sebi) recently issued a discussion paper to increase the number of Qualified Institutional Buyers (QIBs) for debt securities.
The "AT1 bond market may split between strong and weaker banks as investors will continue to prefer investing in stronger banks and avoid investing in weaker banks," Srinivasan adds.