Spread between 10-year G-Sec and repo rate halves

spread between 10 years of government security (G-Sec) The repo rate has nearly halved since the paper was first released in early February. This is due to a surge in demand for G-Secs and a thaw in retail inflation.

The spread (the difference in returns) between the 10-year G-Sec benchmark and the repurchase price has narrowed to 51 basis points as of May 25, from 101 basis points on February 6, when this paper was first issued.

Experts say the current spread is the lowest since 2017.

Madhavi Arora, chief economist, Emkay Global Financial Services, attributed the downturn in spread to higher demand for G-Secs, especially the standard 10-year paper, which pushed yields lower.

Also read: RBI likely to maintain long hiatus, cut repo rate by 100 basis points in 2024

“There is a very high demand for G-Secs… There are no underlying factors for that at this point. The Gather in G-Secs Even US bond yields. G-Secs has rebounded a lot.

“There has been some demand for G-secs from banks, insurance companies and other categories of investors and that’s driving down returns a lot. There is some technical demand that has emerged,” she said.

Yields relaxed

Marzban Irani, Head of Fixed Income Division, LIC Investment Fund said Mutual fund debt schemes They invested in G-Secs in a big way in March as they received strong inflows from the companies. This tempered the quiet G-sec yields a bit.

Irani noticed that companies wanted to take advantage of The old tax system that allowed for indexation benefits To achieve long-term capital gains from debt mutual funds. This favorable tax advantage Canceled effective April 1, 2023.

While the yield of the 10-year paper decreased, the The buyback rate was steady at 6.50 percent after The last rise of 25 basis points was on February 8thwhich led to a contraction in the spread, he added.

little chance

Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund, noted that typically, the spread between long-term bond yields on the repo rate narrows closer to the start of the rate cut cycle.

“At this point, the possibility of a rate cut in 2023 seems very slim given the Consumer price index inflation is still far from RBI target of 4 percent. Thus, the valuation of 10-year government bonds trading below 7 percent seems a stretch.

The dynamics of supply and demand

The supply and demand dynamics look unfavorable in the future.

“In the past two months, the balance between supply and demand in the bond market has been supported by – (1) forward loading of demand from mutual funds and insurers, (2) potential purchase (based on media reports) from Russian issuers and demand from Merger of HDFC Bank and HDFCand (3) a lower than indicative supply of state government bonds.

We expect these one-off demands to fade over the coming months. Overall, in the 2023-24 financial year, we expect a net deficit in natural demand for central and state government bonds of about Rs.2.6 crore.

Therefore, there will be a need RBI to buy bonds in the latter half of the year, the absence of which could cause bond yields to rise again.