Government Securities (G Secs) rose on Wednesday with yields closing at the lowest in 13 months, in line with the move in US Treasury yields which fell on expectations that the rising cycle of Federal Reserve rates may end soon.
The widely traded 7.26 percent yield 2033 G Sec ended the day at 7.0057 percent (previous close: 7.0942 percent), marking a 9 basis point drop.
The closing price of this security was Rs 101.76 (Rs 101.1375). The next widely traded security, the 7.26 percent 2032 G Sec, ended the day at 7.0566 percent, down 8bp (previous close: 7.1401 percent). The closing price of this security was Rs 101,355 (Rs 100.79).
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Eyes on the Federal Reserve
“The trigger for Wednesday’s G Sec rally was the likelihood of the Fed hitting the pause button and a thaw in global crude oil prices, which were at a five-month low. Lower oil prices could reduce inflation. The RBI monetary policy committee has already maintained the status quo on the policy rate,” said a public sector bank trader.
Since April 6, when the monetary policy committee voted unanimously to keep the policy repo rate unchanged at 6.50 percent, the benchmark 10-year G Sec index yield has plunged 27 bps, and its price skyrocketed to ₹1.91.
HDFC and HDFC Bank are understood to have bought G-Secs in a big way on Wednesday to meet legal liquidity ratio (SLR) requirements in view of their impending merger. Banks are required to hold SLR at 18 percent of their deposits. Insurance companies also jumped on board, boosting the G Sec market.
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‘Not sustainable’
Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said the market was encouraged by the possibility that the Fed could end its tightening cycle.
“However, this rally is not sustainable. If the Fed raises the rate and signals it may pause in the future, the benchmark 10-year yield could fall to 6.95 percent and trade in the 7.00 to 7.25 percent range, in the future,” he said.
Experts say the fall in G Sec yields could help both the government and India Inc to reduce the cost of borrowing.