Government Bond Yields – Higher or lower from here?

Government Bonds have always been considered as a safe investment option by many. With a lock in period and a specific rate of return, low risk investors tend to prefer the bonds over any other investment option. The bonds were considered as high-yield in the past but the Government policies and regulations have lowered bond yields.Indian Bond yields have a bearish run and the 10 year bond yield was at 7.4 percent at the beginning of April and has reached 7.75 per cent at the end of the month. The volatility in the bond market is very high.

Still considered as the one of the best investments, the RBI and Finance Ministry try to manage sentiments and get the yields lower. The RBI has given permission to the Banks to postpone the recognition of the bond portfolio losses of the last two quarters by spreading it over the next four quarters. It is advisable to stay away from high yield investment program that promises to pay highest rates on the investment made by you. The bond prices and yields change from time to time depending on the regulations by the RBI and Finance Ministry.

The corporate bond yields may fall after RBI withdrew a rule which required foreign portfolio investors to invest in government bonds with three years of maturity. The investors will resume buying Indian debt but there is little appetite for Indian bonds among domestic and foreign investors. This is due to higher yields over the uncertainty in interest rates and the falling rupee. The new rules by the RBI could improve the market sentiment as they are more favorable to foreign investors. While there will be an increase in the supply of corporate bonds, the CD ratesare expected to fall in yield by at least 25-30 basis points. The corp bond yields on AAA-rates bonds of public sector entities have shown a rise around 8 percent. Further, the yield on 10 year government bond has reached 7.761 percent. It is expected that the investment by foreign investors will allow the rates to increase in the future. Foreign investors are attracted to investment options that have a lock-in period of three to five years; hence, they will show a rise in demand for bonds. The yields will remain elevated in the future even after taking inflation into consideration. The long term bond yield consider future expectations of government finances, inflation and liquidity hence they are more volatile as compared to short term yields. With the Indian economy finally reviving, the bond yields will be higher in the future.

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