India bond traders seek buybacks as yields climb despite switch

Indian bond market participants say that the market will ​need further support, particularly via buybacks, ​to cool yields significantly, after government bonds surrendered the gains ​triggered by a surprise debt switch.

The 10-year benchmark bond yield was at 6.6878% on Friday, up nearly 5 basis points from the day's low hit after the government switched bonds worth 755 ‌billion rupees ($8.3 billion) maturing ⁠next ⁠year with long-term notes held by the central bank.

Switch operations are part of the government's debt management ​strategy, and the latest one has lowered repayment and borrowing needs for the next fiscal ​year.


Concerns over a demand-supply imbalance in the bond market have pushed the 10-year yield to levels seen more than a year earlier before the central bank started ​easing policy.

"Supply is a big concern in the ⁠current environment ‌and if there is a cash surplus, the government should go for buybacks, which would reduce the pressure on next year's borrowing," said VRC ⁠Reddy, treasury head at Karur Vysya Bank.

Bond yields have ​risen due to weak demand from investors and hefty supply, ​dampening the impact steep policy rate cuts have had on the economy. Record bond purchases by the central bank have also not been enough to assuage the market.

10-YEAR YIELD TO STAY ELEVATED

Heavy government borrowing could keep the yield on long-term bonds under pressure in the coming months, said Murthy Nagarajan, head of ‌fixed income at Tata Mutual Fund. He expects the 10-year yield to rise to 6.80% by March.

The spread of the 10-year ​bond over the ​policy repo rate, the ⁠premium investors demand for holding longer-duration debt, had widened to over 150 bps from 15 bps a year ago.

Despite an already steep yield curve, a further rise ​cannot be ruled out, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

"Unless government deploys its cash balance to buy back some FY27 bonds now, sentiment may remain adverse in the bond market. We continue to expect the benchmark 10-year bond yield to trade in 6.70%-7.00% range near term," Upadhyay said. ($1 = 90.5290 Indian rupees)