MUMBAI: Ever since Prime Minister Narendra Modi began his second innings, prices of government securities (g-secs) have been rising and bond yields have headed lower.

The 10-year g-sec yield has dipped to 6.79% at present, a drop of 57 basis points since the time exit polls were announced on 19 May. While interest rates are headed lower globally, and inflation has been tamed locally, there is another factor at play in India.

Investors have been pulling out of credit instruments and moving into sovereign paper.

“Even when the g-sec yields have moved southward, we are not seeing a similar move in the corporate bonds and certainly not for the non-AAA side. So, a part of the reason for the g-sec rally is essentially a sort of flight to safety. Within fixed income markets, people are preferring to own government securities rather than credit papers," said R. Sivakumar, head, fixed income, Axis Mutual Fund.

The end result is that there is a deeper yield gap between the prices of government securities and the corporate bond market.

Over the last few months, the corporate bond market has been rattled by news of defaults. Several credit-risk and medium-term debt mutual funds took large hits to their net asset values, after they had to mark down debt paper of non-banking financial companies.


As pointed out earlier, global yields have also softened as the European Central Bank is expected to infuse liquidity through rate cuts. The US Federal Reserve has also hinted that it will cut rates later this year. The 10-year Treasury yields have slipped to 2.01% and are down 41 basis points in the last month.

Market observers say that g-sec yields in the domestic credit market are expected to remain soft.

Much, however, will depend on how the government’s fiscal policies look like in the forthcoming budget. A budget that caps the fiscal deficit will give the Reserve Bank of India further legroom to cut interest rates in the coming quarters.

Having said that, analysts contend that from here on, g-secs may not rally much, given that yields have fallen sharply already this year.


Close