Indian bond yields end February lower on surplus liquidity

MUMBAI: Indian government bond yields fell in February as surplus banking liquidity supported demand ahead of record government borrowing in the next fiscal year, while the yield curve steepened as rates across tenors were impacted by varied factors.

The benchmark 6.48% 2035 bond yield ended at 6.6603% on Friday after closing at 6.6943% on Thursday. The yield fell 4 basis points this month after rising for three straight months.

Bonds had a mixed start to the month after New Delhi announced a higher-than-expected gross borrowing of 17.2 trillion rupees ($189 billion) for the financial year that starts April 1.

Sentiment was further dented by the Reserve Bank of India’s policy decision, which investors viewed as less dovish than expected after it did not announce any liquidity-infusing measures.

While these factors continued pressure the benchmark paper, a steady liquidity surplus pulled down yields across the shorter end of the curve.

The two-year yield was down 20 bps in February, while the three-year yield fell 16 bps. The five-year and seven-year bond yields slipped 10 bps and 6 bps, respectively.

The ultra-long 30-year and 40-year bonds witnessed strong demand over the last few sessions, ending the month little changed.

Demand improved after Reuters reported earlier this week that several market participants had suggested lowering or maintaining the share of 30- to 50-year bonds in next fiscal year’s supply, starting from April 1.

“Given the steepness of the yield curve, the long-end offers reasonable value from a valuation perspective. Long-duration exposure may suit investors with a higher risk appetite and longer investment horizon,” said Abhishek Bisen, fixed income head at Kotak Mutual Fund.

Rates

India’s overnight index swap rates fell in February on heavy receiving amid comfortable liquidity surplus and a decline in U.S. Treasury yields.

The one-year OIS rate ended at 5.48% and the two-year rate closed at 5.59%, posting their biggest monthly decline since April.

The five-year OIS rate ended at 5.99%, down 17 bps for the month, biggest fall in 10 months.