The yield on Indian government treasury bonds has reached its highest level in over a year. This increase has occurred due to weak investor demand in recent treasury bond auctions.
Increase in Treasury Bond Yields
The yield on 91-day treasury bonds has risen to 5.93 percent, up from 5.73 percent in the previous auction, indicating a significant increase. Similarly, the yield on 182-day bonds reached 6.55 percent and the yield on 364-day bonds reached 6.69 percent. These increases reflect weak demand in the auctions and failure to meet market expectations.
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Impacts on Domestic Bond Market
While banks and investment funds may have purchased some of the bonds, the coverage ratio in these auctions has been estimated at 1.74, indicating weak demand. Additionally, the yield curve of domestic bonds has steepened over the past week, with short-term yields rising while long-term yields have decreased.
ICICI Bank predicts that the yield on 10-year government bonds will fluctuate between 7.30 and 7.45 percent in the short term. In the government securities auction, the Indian government has raised 33,000 crore rupees, while the coverage ratio in these auctions was 2.4, lower than the long-term average of 2.8.
Furthermore, it appears that the increase in borrowing by state governments could lead to a further widening of spreads. Twelve states will collectively borrow 29,900 crore rupees this week, exceeding the calendar amount of 26,200 crore rupees. ICICI Bank has stated that the spread on state development loans compared to government securities is likely to increase.
Regarding liquidity, the system surplus has expanded to 1.6 lakh crore rupees or 0.6 percent of time commitments and demand. Liquidity conditions seem to remain comfortable, and reversing the 30-day variable rate reverse operations will also act as support in this regard.
ICICI Bank has also noted that global developments will impact market sentiment, and the U.S. midterm elections and labor market data, including employment and unemployment statistics, will be key events to monitor.
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