Bond Yields Break Higher: Market Jitters Intensify After RBI’s Surprise Policy Shift

Mumbai, June 11, 2025: India’s government bond market is likely to stay under pressure as investor sentiment softens in the aftermath of the Reserve Bank of India’s (RBI) recent monetary policy announcement.

Yields Climb on Fading Investor Appetite

The benchmark 10-year government bond yield is anticipated to move between 6.27% and 6.33% during early Wednesday trading, a notch above Tuesday’s closing level of 6.2946% — the highest yield recorded since May 9.

The five-year 6.75% 2029 bond, which settled at 5.9513% on Tuesday, has extended its gradual upward movement that began last Friday. This upward momentum follows the RBI’s announcement of a sizeable 50-basis-point rate cut, combined with a shift in policy stance to “neutral,” signalling a reduced likelihood of additional rate reductions.

Muted Response to State Borrowing Spurs Market Weakness

The bearish sentiment deepened after a state debt auction on Tuesday drew poor interest from investors, pushing yields past the 7% threshold — the first occurrence in this financial year. This surge wiped out earlier gains driven by value-focused buying, underlining the market’s cautious tone.

Commenting on the development, a dealer from a private-sector bank remarked, “The market showed some initial optimism after the policy announcement, but the tepid response to the state debt auction has dragged it back into negative territory.”

Cautious Outlook Despite Aggressive Rate Cut

Although the RBI implemented its sharpest rate reduction in five years, medium- and long-tenure bond yields have continued to rise. This is largely due to the RBI’s guidance indicating the conclusion of the current rate-cutting cycle, prompting investors to gravitate towards short-duration bonds instead.

Meanwhile, Overnight Index Swap (OIS) rates have moved higher across tenures:

• 1-year OIS: 5.54%
• 2-year OIS: 5.51%
• 5-year OIS: 5.73%

According to VRC Reddy, Treasury Head at Karur Vysya Bank, “With more liquidity and lower overnight rate fixings, there is still room for receiving in the one-year swap, but the long-end should see some paying.” This shift reflects a broader re-pricing of rate expectations over the medium term

The upcoming treasury bill auction worth ₹19,000 crore (equivalent to $2.22 billion) by the RBI is expected to play a pivotal role in shaping the near-term market trajectory.

Steeper Curve as Focus Shifts to Short-Term Bonds

RBI’s 50-bps rate cut and CRR reduction have steepened the yield curve, with short-term bond yields falling 4–5 bps and the 10-year jumping 18 bps since Friday.

Investors are shifting to shorter durations amid doubts over further easing. The CRR cut also reduces the need for RBI’s long-end bond purchases, weakening demand for longer-term debt.

Implications for Corporate Borrowing and Debt Funds

Rising yields are likely to have ripple effects across the financial ecosystem. Corporate borrowers, particularly NBFCs and infra-linked firms, could face higher coupon costs on new debt issuance. At the same time, long-duration debt mutual funds may experience NAV pressure as bond prices adjust downward — a risk that could trigger cautious inflows into fixed-income schemes.

Global Market Signals Remain Mixed

On the global front, commodity and bond markets offered contrasting cues:

• Brent crude futures slipped 0.2%, trading at $66.75 per barrel
• US 10-year Treasury yield stands at 4.4639%
• US 2-year Treasury yield is currently at 4.0139%

With the RBI expected to keep interest rates unchanged for the rest of the financial year, traders are likely to maintain a cautious approach and adopt selective strategies in the bond market.

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