Govt Bond Yields Show Slight Uptick After JP Morgan Index Inclusion, Here’s The Bond Market Outlook

Indian government bond yields, which had remained stable throughout the week, showed a slight uptick after their inclusion in JP Morgan's Government Bond Index-Emerging Markets (GBI-EM). 

The benchmark 10-year government bond yield ended the week on June 28, 2024 at 7 per cent, up from its previous close of 6.9 per cent.

Also, the yields are 2 basis points (bps) higher than its close at 6.97 per cent last weekend.

The benchmark 10-year yield has many factors favouring its slip, such as market participants expecting two US Federal Reserve rate cuts in FY25, even as projections have been revised to one rate cut this year.    

Market participants were also underwhelmed when they saw a lacklustre response from foreign inflows.

However, the monthly inflows are robust. According to data from the Clearing Corporation of India, as much as Rs 46,954 crore worth of government bonds were purchased by foreign banks in June 2024. Similarly, foreign portfolio investors have bought Rs 15,616 crore worth of government bonds this month.  

Additionally, it is anticipated that Indian government bonds may be included in the Bloomberg Barclays EM Index and FTSE Russell Index, which will further improve inflows into the Indian bond market. Other than deepening the Indian bond markets, experts suggest that the yield on corporate bonds may decrease, as a result of index inclusion.

Treasury And Bond Yields

The indicative yield for T-bills currently stands at 6.80 per cent, 6.91 per cent, and 6.95 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 8.20% Govt.Stock 2025 indicates a yield of 6.97 per cent.

Moving on to longer tenures, 7.37% GS 2028 (4-5 year tenure) and the 7.10% GS 2034 (9-10 year range) both show indicative yields of 7 per cent.

Bond Market Outlook

The inclusion of Indian bonds in the JP Morgan index is expected to increase demand from foreign investors, thus increasing bond prices and lowering yields.

Looking ahead, fiscal deficit targets, and the government's borrowing plans remain the key focus of the debt market participants. Further the next monetary policy committee (MPC) meeting in the first week of August is crucial in determining the repo rate, as one more MPC member favouring the rate cut will bring in the casting vote of RBI Governor Shaktikanta Das. 

For retail investors, the index inclusion means more opportunities for diversification and improved liquidity, say experts. 

Global investors see the Indian market as an attractive opportunity with high duration and above-average nominal yield instruments among the index. Further, it comes at a perfect time when they were seeking to allocate capital to emerging markets.