Bond Yields Slip On Liquidity Surge

Indian government bond prices rose on Monday, supported by a rally in the U.S. Treasuries and a sharp improvement in domestic liquidity. Even so, persistent concerns around heavy government borrowing and uneven demand limited the upside.

The benchmark 6.48% 2035 bond yield settled at 6.6642%, down from 6.6799% on Friday. Since bond yields move inversely to prices, the decline suggests fresh buying interest. Longer-duration securities saw a sharper move, with the 15-year bond yield easing to 7.068% and the 40-year bond yield slipping to 7.4520%.

Why Did Bond Yields Fall on Monday?

The immediate trigger was a combination of global and domestic factors. U.S. Treasury yields have declined about 15 basis points over the past week, falling to multi-month lows near 4.05% after softer inflation data. Lower U.S. yields typically support emerging market debt by making it relatively more attractive.

At the same time, liquidity conditions in India have improved meaningfully. Average daily system liquidity surplus in February stands at ₹2.62 trillion, compared with ₹660 billion in January. With more cash in the system, demand for bonds tends to strengthen.

Market participants also noted that current yield levels appear attractive, especially in longer-duration papers that have seen a sharp rise in recent months.

Why Are Longer-Term Yields Still Elevated?

Despite Monday’s decline, yields at the longer end of the curve remain significantly higher than earlier levels. Yields on 15- to 40-year bonds have risen 40–50 basis points so far in fiscal year 2025–26. This has happened even after a cumulative 100 basis points of policy interest rate cuts.

The main reason is concern over supply and patchy demand from long-term investors. Heavy government borrowing has kept pressure on the long end, and investors are demanding a higher premium to hold longer-duration debt.

The spread between the 10-year bond yield and the policy rate has widened sharply compared with last year. That indicates investors are seeking greater compensation for duration risk, reflecting caution about future borrowing levels and demand conditions.

Can Liquidity Support Sustain the Rally?

Improved liquidity has clearly helped stabilise the market. The recent debt switch operation has also reduced near-term repayment pressure, offering some relief to investors worried about immediate supply.

However, many in the market believe that a sustained ease in yields will require more steps, which could include buybacks, open market operations, or steps to manage the maturity profile of issuances. In the absence of such support, supply issues could resurface, which could cap the upside.

In the derivatives market, overnight index swap rates declined in line with the fall in global yields. All rates, including the one-year, two-year, and five-year rates, declined by 1.25, 2.25, and 4 bps, respectively.

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For now, surplus liquidity and supportive global cues are providing a cushion. But with borrowing needs still substantial, the bond market’s recovery is likely to remain measured rather than sharp. The coming weeks will show whether improved liquidity is enough to anchor yields at lower levels or whether supply worries once again take centre stage.

Sources

Economictimes

Reuters