Now, traders eye long-term bonds

After pulling down yields on liquid government bonds by about 135 basis points in last one month, traders are now likely to cherry-pick along the yield curve taking advantage of the spreads some of the longer-term bonds enjoy over the benchmark papers.

The broader market sentiment will continue to be up beat and yields will continue to drift lower, albeit at a slower pace, bond traders said.

“Currently, spread between a 10-year paper and 24-year paper is around 70 bps which in a bullish market like now should be only 30-40 bps. So, there is a lot of juice left in the longer segment,” said S Srinivasa Raghavan, head of treasury at IDBI Gilts.

But Raghavan believes the shift will be gradual. “There is a chance trade would be choppy and yields might rise due to profit taking. So, banks will be making the shift little by little.” In the last four weeks, yield on the 10-year benchmark 8.24%, 2018 paper has fallen by 135 bps, while the 7.95%, 2032 paper has declined 113 bps.

“In absolute terms, when fall in yields may be similar for the two papers, the longer paper has already surpassed the profit created by the 10-year. So, when the expectation is that 10-year yield will fall to 5.50 per cent, the longer paper will be in demand,” said S Ananthanarayan, senior vice-president of treasury at Kotak Mahindra Bank. This difference in profit created by the two bonds is because yield on a 10-year paper drops by 1bps when price rises by 7 paise but the yield on the 2032 paper will fall by similar level only when the price increases by 13 paise.

The massive fall in bond yields across-the-board has been triggered by the big interest rate cuts effected by Reserve Bank of India in its bid to bolster demand in the economy.

Since October, RBI has cut its key Reverse Repo Rate by 100 bps and its Repo Rate by a massive 250 bps. And most participants believe the rate cut series has only just begun.

“Further rate cuts are imminent given the slowdown in the local economy which is reflecting in the industrial production numbers. So, we may see the 10-year yield below 6 per cent in January,” Raghavan of IDBI Gilts said.