State debt deluge keeps bond yields under pressure

Synopsis

Indian government bond yields are expected to face pressure due to a record weekly supply of state debt, with auctions likely to exceed notified amounts. This significant issuance could lead to a crowding-out effect, pushing the 10-year benchmark yield towards 6.90%-6.95%.

Mumbai: Indian government bond yields are expected to remain under pressure as markets prepare for a record weekly supply of state debt, with the final state loan auction of the financial year due Friday, traders said.

States raised ₹54,834 crore at Tuesday's auction, well above the indicative ₹47,985 crore, and dealers expect borrowing on Friday to again exceed the notified amount, with states likely to raise ₹42,941 crore against an indicated ₹12,000 crore in the calendar.

Total state development loan (SDL) supply for the week could approach ₹1 lakh crore, adding to pressure on central government bonds and pushing the 10-year benchmark yield towards 6.90% to 6.95%, market participants said.

"SDL supply of around ₹1 lakh crore in a single week is quite significant and could have a crowding-out effect, putting pressure on government bonds," said Mataprasad Pandey, vice president at Arete Capital Services. "With such heavy issuance, the 10-year g-sec yield could move above 6.90% by Friday."

Agencies

SDL supply this week could touch ₹1 L-cr; pushing 10-yr yield towards 6.90–6.95%

The benchmark 10-year yield closed at 6.87% on Wednesday, after rising steadily from 6.73% last week, tracking elevated crude oil prices and heightened geopolitical risks linked to the West Asia conflict.

"The pressure is felt in the market and when sentiment weakens, there is fear that causes yields to rise," said a bond trader at a primary dealership.

The Reserve Bank of India's decision to cancel a treasury bill auction on Wednesday may help ease short-term funding costs, but traders said it is unlikely to materially cap long-term yields. "T-bills are short term, so cancelling them impacts CP and CD rates, but it had no meaningful impact on the 10-year yield," a trader said.

Madhavi Arora, chief economist at Emkay Global, said India remained caught between global uncertainty and supply pressures, adding that the 10-year yield could edge up to 6.95% in the near term.

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