Business Standard

Shorter-tenure govt bonds lag ‘longer’ peers

- ANJALI KUMARI Mumbai, 19 February More on business-standard.com

Short-term government bonds fell behind longer-dated securities in demand this month so far due to a liquidity crunch in the banking system and expectatio­ns of a delay in a rate cut, said market participan­ts. Investors have favoured longer-tenure government bonds, or g-secs, with insurance firms and pension funds leading the charge by stocking up on those with maturities of 30 years and more.

Preference for longer-term securities was strengthen­ed by the conclusion of the borrowing programme on Friday, which compelled institutio­nal investors to fulfil their requiremen­ts in the secondary market. While banks tend to favour shorter tenures due to their liability profiles, investors such as pension funds and insurance companies prefer longer-term bonds to match their long-term obligation­s.

Consequent­ly, the middle of the curve, particular­ly the range of 10-14 years, becomes primarily focused on trading rather than long-term investment. The yield on the 40-year government bond fell by 12 basis points in February as of Friday (the money markets were closed on Monday). Bonds with a maturity of up to five years were out of favour, with the yield on five-year and three-year government bonds rising by 1 and 3 basis points, respective­ly, in the same period. The yield on the benchmark 10-year government bond, too, fell by 5 basis points in February.

Liquidity in the banking system has remained in deficit since December 5, 2023. It stood at ~2.10 trillion on Thursday, according to the data from the Reserve Bank of India (RBI).

“Short-term bonds are not in favour because of deficit liquidity and rate-cut expectatio­ns being pushed back,” said VRC Reddy, head of treasury, Karur Vysya Bank. “Long-end is in favour because the (Union) Budget was positive, and the market knows rate cuts will be delayed, but it is certain (there will be cuts). So, the market is taking positions on the long end in the hope that the next step will be a rate cut,” he added.

Meanwhile, the bond market exhibits a nearly flat yield curve with a slight inversion.

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