Government securities yield curve set for bull-steepening amid lower borrowing and rate cuts

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Lower shorter-tenor borrowing by the Government, impending rate cuts, and higher FPI positioning in the sub-7-year tenor could reinstate the bull-steepening bias of the Government Securities (G-Secs) yield curve in the near term, according to a report by Emkay Global Financial Services Ltd (EGFSL).

Bull steepening refers to a phenomenon wherein short-term interest rates fall faster than long-term rates, resulting in a higher spread between the two rates and a steepening of the yield curve.

“The G-Sec curve has bull-flattened (whereby long-term rates fell faster) since June but near-term, we see bull-steepening bias to be reinstated…,” said Madhavi Arora, Chief Economist, and Harshal Patel, Research Associate, EGFSL.

However, 4Q (January-March) FY25 could again favor bull-flattening (long-term rates falling faster) led by long-only market players, especially amid lower supply.

The EGFSL economists observed that there has been no major surprise in 2H (October-March) FY25 gross borrowing at ₹6.61 lakh crore, with the Government of India (GoI) sticking to the FY25 budgeted gross borrowing target of ₹14.01 lakh crore and issuing ₹7.4 lakh crore 1H (April-September) FY25 vs the indicated ₹7.5 lakh crore.

However, this has meant that the 2HFY25 gross borrowing is a higher proportion of annual issuance vs last year. It stands at 47.2 per cent of full-year borrowing vs 42.4 per cent/40.5 per cent for 2HFY24/2HFY23, respectively, but is down nearly 0.9 per cent year-on-year (YoY).

Net supply is up 27.2 per cent year-on-year (YoY) at ₹4.75 lakh crore.

There are ₹20,000 worth of Sovereign Green Bonds (SGBs) issuances scheduled in 2HFY25 (3.1 per cent of total issuance) vs ₹12,000 crore in1HFY25.

Overall, 2H redemption at ₹1.73 lakh crore could see minor tweaks if the government decides to switch some papers to later years, the Economists said.

“While India bonds have seen structurally improved demand-supply dynamics, we are watching the evolution of the rate-cutting cycle globally and back home, and are still skeptical of a sub-6.50% level for 10 Year in the coming months,” Arora and Patel said.