Analyst Predicts Bond Yields (BND) to Drop to 6.50% by Q4FY25: Key Insights for Investors

<ul>
  <li>Indian government bond yields stayed below the 7% mark on Tuesday as underlying sentiment remained supportive.</li>
  <li>Analysts expect further easing in bond yields going ahead.</li>
  <li>"The maximum impact of the higher dividend was seen at the longer end of the curve with bond markets feeling optimistic about a cut in government borrowing," said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.</li>
</ul>
<p><strong>Indian government bond yields remain below 7% as market sentiment stays positive, driven by RBI's higher-than-expected dividend transfer.</strong></p>
<h2><strong>RBI's Dividend Boosts Market Sentiment</strong></h2>
<p>The Indian bond market received a significant boost after the Reserve Bank of India (RBI) approved the transfer of ₹2.11 lakh crore dividend to the government for the financial year 2023-2024. This amount was more than double what the market had expected, providing the central government with considerable fiscal flexibility. As a result, bond yields dropped, the rupee appreciated, and stock markets reached new highs.</p>
<h3><strong>Impact on Bond Yields and Market Dynamics</strong></h3>
<p>The higher dividend amount has had a profound impact on the bond market, particularly at the longer end of the curve. Puneet Pal, Head-Fixed Income at PGIM India Mutual Fund, noted that the bond markets are optimistic about a potential reduction in government borrowing when the full Budget is presented in July. Yields at the shorter end of the curve also declined due to lower borrowing in T-bills, which may increase the government surplus to ₹6 lakh crore after the RBI dividend transfer. The 3-month T-bill yield has decreased to 6.85% from 6.99%, and 3-month bank CD yields have also dropped by 10-15 basis points.</p>
<h3><strong>Future Outlook for Bond Yields</strong></h3>
<p>With core inflation hitting an all-time low of 3.20% and the fiscal leeway provided by the higher-than-expected dividend, analysts believe bond yields will continue to drift lower. The favorable demand-supply dynamics are expected to provide the necessary tailwind. Puneet Pal mentioned that the global monetary tightening cycle has effectively ended, and the likelihood of further rate hikes in the US remains low despite hawkish posturing by some FOMC members. He expects the benchmark 10-year bond yield to move towards 6.50% by Q4 of FY25.</p>
<h3><strong>Conclusion</strong></h3>
<p>In conclusion, the Indian bond market is experiencing a positive shift due to the RBI's substantial dividend transfer. Investors are advised to increase their allocation to fixed income at every uptick in yields. Those with medium to long-term investment horizons can consider Dynamic Bond Funds with a duration of 6-7 years, while investors with a 6-12 month horizon can look at Money Market Funds. The overall outlook for bond yields remains favorable, with expectations of further easing in the near future.</p>