Flat benchmark yields to weigh on banks' treasury gains in Q3FY25

While a softening of yields was observed on expectations of a rate cut, yields climbed again, tracking the rise in US Treasury yields

Banks’ treasury income is expected to remain subdued during the October–December quarter of the current financial year (Q3FY25), as benchmark yields remained largely unchanged at the end of the quarter.

 

Market participants said that unlike July–September (Q2FY25), where substantial profits were booked by rates trading desks of banks, Q3 is poised to reflect a sharp decline in such gains.

 

The yield on the benchmark 10-year government bond moved up by 1 basis point (bps) to settle at 6.76 per cent at the end of Q3FY25. In Q2FY25, the benchmark yield had softened by 25 bps.

 

While softening of yields was observed on the expectation of rate cut, yields climbed again, tracking the rise in US Treasury yields.

   

Market participants said the extent of gains largely depended on the timing of trades. Traders who capitalised on the earlier decline in yields could have booked profits.

 

However, with yields retracing back by the year-end —specifically around December-end — those who held their positions longer faced diminished mark-to-market (MTM) gains.

 

“The rates trading desk may not see significant income, as there was only a small movement that people might have captured. It also depends on timing — yields had fallen substantially, so those who exited positions early could have booked some profits. Yields later retraced,” said the treasury head at a private bank.

 

Despite the subdued activity in the rates segment, the foreign exchange (FX) side showed potential for generating trading income.

 

Currency markets witnessed noticeable fluctuations, offering opportunities to banks that made accurate trading calls.

 

While this could partially offset the muted treasury gains, FX trading alone is unlikely to match the profit and loss contributions observed in the previous quarter.

 

When comparing Q3 with Q2, the disparity in treasury income is expected to be significant.

 

“If we compare it to Q2, obviously there is going to be minuscule treasury gains from the rates trading desk at least. But I think there was a fair amount of movement on the FX side. So, there could be some trading income if trading calls were made correctly on the FX side,” said the treasury head of another private bank.