MUMBAI: A Significant Shift in Bond Yields

The benchmark 10-year bond yield has made headlines by dropping below the 6.5% mark for the first time in more than three years. This notable decrease is attributed to several factors including easing liquidity, the government's strategic decision to spread its borrowings evenly for the fiscal year, and the recent stability of the rupee.

Market Reactions and Expectations

On Wednesday, government bonds maturing in October 2034 opened at a yield of 6.55%, down from Tuesday's close at 6.58%, and continued to rally throughout the session to close at 6.48%. This movement marks the biggest drop in the benchmark yield in over two years, with the day's closing being the lowest since January 2022.

Experts point to the RBI's efforts to infuse more than Rs 5.5 lakh crore into the system since January to alleviate the liquidity crunch from December 2024. Additionally, a surprise open market operation announced by the RBI to buy bonds worth up to Rs 20,000 crore has further buoyed market sentiments.

Looking Ahead

With expectations of a 25 basis points rate cut on April 9 and a stable inflation trajectory, bond prices are rallying. "Yields are expected to soften further in the absence of liquidity leakage and substantial investor confidence in the market," noted a bond fund manager. This optimism is supported by the government's announcement to borrow 54% of its planned FY26 borrowing during the first half, limiting gilt supply until September and supporting bond prices.