Govt bond yields slide 5 bps over weekend, in tandem with US benchmark

Signs of weakening economic growth worldwide raising questions over the degree of policy tightening by central banks

The Indian government bond yields fell sharply on Monday, mirroring US bond yields over the weekend, as signs of weakening economic growth worldwide raised questions over the degree of policy tightening that central banks may execute.

Yield on the domestic 10-year benchmark 6.54 per cent 2032 paper fell 5 basis points (bps) to settle at 7.37 per cent on Monday. Bond prices and yields move inversely.

On Friday, yield on the 10-year US Treasury note — a global pricing benchmark for debt — registered its steepest drop since March, closing 7 bps lower at 2.90 per cent.

The rally in the US bond market has been driven by an increasingly gloomy outlook on economic growth in the country, with several disappointing data sets released last week strengthening the pessimism.

The prospect of a recession in the world’s largest economy has exerted its impact in the domestic bond market.

The message emanating from domestic bond traders is clear — as growth slows down globally, the Reserve Bank of India may have to dial down monetary tightening.

“There is a re-rating happening globally with regard to growth prospects. The recession theme is playing out. There is widespread buying in the domestic market too,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.

“The feeling is that when the growth risks are so strong, central banks won’t be able to hike too much beyond a point. Our 10-year could even go to 7.25 per cent if the momentum continues.”

Domestic bond traders have little doubt about the fact that the RBI will raise interest rates again at its next policy review in August, but the price action in the market shows increasing conviction that the repo rate may not be lifted as much as was earlier feared.

Barely, three weeks ago, on June 16, yield on the 10-year paper had climbed to an over-three-year high of 7.62 per cent as the theme of aggressive rate hikes played out strongly following the US Federal Reserve’s 75-bp hike a day before.

Senior treasury officials said that while the RBI is seen raising the repo rate by around 75-100 bps in the coming months, a view gaining momentum in the market is that the central bank may stop there.  

The earlier view in the market was of the repo rate heading to at least 6.50 per cent from its current level of 4.90 per cent. The RBI has hiked the repo rate by 90 bps since May 4.

Given that the bond market has already priced in much policy tightening — yield on the 10-year paper closed at 6.45 per cent at the end of 2021 — dealers said that there was room for yields to fall further.

The decline in yield on the five-year government bond on Monday bears testament to the view on policy tightening as short-term papers are more sensitive to interest rate expectations. Yield on the five-year paper dropped 5 bps to 7.16 per cent.

“The shift in the growth view is playing out quite significantly,” a treasury official with a large foreign bank said.

“The recent signals emanating from the RBI too suggest that beyond a point, growth won’t be sacrificed beyond a point. If you look at the OIS (overnight indexed swap) curve, it shows how much the rate view has changed. The 5-year OIS has plunged almost 60 bps in 16 days.”

From 7.34 per cent on June 16, the five-year OIS rate has declined 57 bps to settle at 6.77 per cent on Monday.

The OIS market is largely a play on future interest rate expectations, unlike the government bond market, where the direction of yields is also majorly influenced by demand-supply dynamics.

The Indian OIS market is, however, not always a reliable indicator of the degree to which interest rates may move as the positioning of offshore entities plays a large role in determining the trajectory of swap rates.