G Secs rally on expectations of Fed hitting a pause on rate hikes

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Government Securities (G Secs) It rose on Wednesday as yields closed at a 13-month low, coinciding with movement in US Treasury yields which eased on expectations that the Fed’s rate hike cycle may soon end.

The widely traded 2033G sec yield of 7.26 percent ended the day at 7.0057 percent (previous close: 7.0942 percent), recording a decline of 9 basis points.

The closing price of this security was ₹101.76 (INR 101.1375). The next widely traded bond, 7.26 percent 2032 Gs, ended the day at 7.0566 percent, down 8 basis points (previous close: 7.1401 percent). The closing price of this security was ₹101.355 (INR 100.79).

Eyes on the Fed

“The reason for the higher G Sec on Wednesday was the possibility that the Fed will hit the pause button and thaw global crude oil prices, which were at a five-month low. Lower oil prices could lead to lower inflation,” said a trader at Public Sector Bank The Monetary Policy Committee of the Reserve Bank of India has already maintained the status quo on the interest rate.

Since April 6, when the Monetary Policy Committee voted unanimously to keep the policy repo rate unchanged at 6.50 per cent, the yield of the 10-year G Sec standard has fallen by 27 basis points, with its price rising to ₹1.91.

HDFC and HDFC Bank are known to have massively purchased G-Secs on Wednesday in order to comply with statutory liquidity ratio (SLR) requirements in light of the impending merger. Banks are required to maintain an SLR rate of 18% of their deposits. Insurance companies also piled up, which led to a rebound in the G Sec market.

Not sustainable

Marzban Irani, head of the fixed-income division of the LIC Cooperative Fund, said the market has rebounded with the prospect that the Fed will end the tightening cycle.

However, this rise is not sustainable. If the Fed raises the interest rate and signals it may pause going forward, the yield for the 10-year index could fall to 6.95 percent and trade in the 7.00-7.25 percent range, going forward,” he said.

Experts say the decline in G Sec yields can help both the government and Company India to reduce the cost of borrowing.