Bond yield curve expected to steepen amid lower govt borrowing in H1

Bond yield curve: The government's decision to reduce borrowing, particularly through a cut in the supply of shorter-tenor papers in the first half of the next fiscal year, is anticipated to boost bond demand and result in a steepening of the yield curve.

Arun Bansal, Executive Director and Head of Treasury at IDBI Bank, stated that the investor-friendly calendar for the upcoming financial year could lead to some steepening in the yield curve during the first quarter. 

He stressed that the central bank's monetary policy stance and rate actions would be crucial factors influencing this trend.

The government plans to borrow Rs 7.5 lakh crore in April-September, which accounts for 53 per cent of the total planned borrowing for the fiscal year. 

The figure is below market expectations of approximately 58 per cent front-loading. 

The government intends to borrow only 23 per cent via three-year to seven-year bonds, compared to 28 per cent for the same period last year.

Finance Secretary TV Somanathan explained that the slightly lower borrowing in the first half aims to optimise cash balances and reduce interest costs. 

The issuance of 10-year paper is expected to increase, potentially putting pressure on the benchmark bond, while lower issuance at the shorter end is anticipated to boost demand in that segment and promote yield curve normalisation, according to VRC Reddy, Treasury Head at Karur Vysya Bank.

The 10-year benchmark bond yield was around 7.04 per cent, while the five-year and seven-year bond yields hovered around 7.05 per cent, resulting in a mild inversion in these parts of the curve.

Additionally, traders noted lower-than-expected supply of treasury bills in April-June, coupled with expectations of improving liquidity conditions, which could lead to downward movements in the ultra-short end of the curve.

Madhavi Arora, Lead Economist at brokerage Emkay Global, highlighted the potential for a "bull-steepening" bias in the yield curve to reinstate, driven by lower shorter-tenor borrowings, improved system liquidity, and higher foreign positioning in bonds below seven years. 

Bull-steepening occurs when yields for shorter-term bonds decline faster than longer-dated paper.

(With Reuters Inputs)