India bonds rise as robust demand for state debt energises bulls

MUMBAI: Indian government bonds ended higher on Tuesday, led by the longer end after stronger-than-expected demand at an auction for state debt and on expectations of reduced issuance of longer maturity notes next fiscal year.

The benchmark 6.48% 2035 bond yield ended at 6.6812%, modestly lower on the day, building on a 2 basis points drop in the previous session in which it closed at 6.6970%. Bond yields move inversely to prices.

Indian states raised 461 billion rupees ($5.07 billion)through sale of bonds, more than the planned quantum of 445.50 billion rupees and cutoff yields for most states were lower than market expectations.

Traders said inflows to insurers and pension funds have increased their appetite for state bonds, while banks are also keen to replenish their stock after having sold notes to Reserve Bank of India in open market operations.

“The uptick in demand can be attributed to a confluence of supportive market factors including scheduled conclusion of borrowing for fiscal 2026 by March which is creating favorable demand-supply dynamics,” said Harsimran Sahni, head of treasury at Anand Rathi Global Finance.

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The softening of U.S. Treasury yields has also improved the relative attractiveness of domestic bonds, while surplus banking system liquidity has provided ample deployable funds within the banking system, he added.

States’ gross issuance has hit nearly 10 trillion rupees for the current financial year ending in March, with at least five more auctions scheduled.

States are also shifting towards longer-dated borrowing and the weighted-average maturity is expected to be around 16 years for this fiscal year, said Bhupendra Meel, chief investment officer - alternates (fixed income), Vedartha, AIF arm of Bandhan AMC.

Traders’ focus now turns to the 320-billion-rupee benchmark bond sale due on Friday.

Rates

India’s overnight index swaps (OIS) saw muted activity as traders awaited fresh cues on interest rates.

The one-year OIS rate ended at 5.5%, while the two-year OIS rate closed at 5.6075%. The five-year OIS rate ended marginally down at 6.0325%.