Bond yield hits 6-week low as Budget sticks to path of fiscal consolidation

Govt move to tax high-value insurance policies may hit demand for long-term bonds: Analysts

Sovereign bonds strengthened sharply on Wednesday despite the government announcing its highest gross market-borrowing programme, as the Budget adhered to fiscal consolidation and refrained from extra sales of dated securities this year.

The yield on the 10-year benchmark government bond slid six basis points to settle at 7.28 per cent, the lowest closing level since December 15, 2022.

The government announced a gross market borrowing of Rs 15.4 trillion and a net market borrowing of Rs 11.8 trillion, largely in line with expectations.

With the government facing a fiscal slippage in absolute terms due to higher-than-expected nominal GDP growth in the current year, bond traders had feared that the Centre could bridge the gap through additional issuances of dated securities. Instead of doing so, the government resorted to increasing its short-term borrowing like Treasury Bills by Rs 50,000 crore.

 “No additional borrowing was announced for FY23, which again is supportive of the IGB [Indian Government Bond] curve. The extra Rs 500 billon of T-bill issuance for FY23 is a small negative,” economists at Japan’s Nomura wrote.

“We had noted the market was more cautious going into this year’s Budget, so the more market-friendly borrowing number should be supportive for the bond market. We continue to favor the 5-10y part of the bond curve,” they wrote.

HDFC Bank’s chief economist Abheek Barua sees yield on the 10-year bond easing to 7.00-7.10 per cent in the next fiscal year, while ICICI Securities Primary Dealership’s MD and CEO Shailendra Jhingan predicts the yield in a band of 7.25-7.40 per cent over the medium term.

Bank treasury officials, however, said that the government’s proposal to tax income from insurance policies having an aggregate premium above Rs 5 lakh in a year could affect demand for long-term bonds.

“That will be a bit negative for the flows into the guaranteed products which were leading to very strong demand for long bonds over the last year or so,” Jhingan said.

In FY23, several banks were said to have entered into derivative contracts such as Forward Rate Agreements and purchased long-term bonds on behalf of insurance companies.

“The yield curve should steepen, particularly the part between the 10-year bond yield and the 30-year and 40-year bond yield which is hardly ten basis points right now. It will go back to 30 basis points by maybe June,” Jhingan said.