The yield spread between India’s 10-year benchmark bonds and 30-to-40 year bonds fell to a four-month low on Monday, following New Delhi’s decision to reduce the issuance of long-term notes in its fiscal second half borrowing schedule.
The government decreased the share of ultra-long bonds to 29.50% of total issuance, down from 35% during the April to September period, and increased the proportion of 10-year bonds to 28.4% from 26.2%.
Market reaction saw the 10-year benchmark bond yield trading around 6.53%, remaining flat compared to Friday’s figures. The yields on 30-year and 40-year bonds were recorded at 7.16% and 7.22% respectively, down by 3 and 4 basis points.
The spread between the 10-year and longer tenor bonds has reached its lowest point since late May, with traders anticipating further narrowing once actual supply enters the market.
This adjustment in the issuance profile aims to curb the rising yields on ultra-long bonds, which have increased by 40 basis points since early June due to significant borrowing from both federal and state governments. Demand from long-term investors, such as insurance companies and pension funds, has also diminished due to declining inflows and a shift towards equity investments.
The federal government’s decision to reduce long-term borrowing could lead to lower yields and, in turn, decrease borrowing costs for states, as noted by traders. This measure is intended to stabilize borrowing expenses amid ongoing public spending at the state level.
Neelkanth Mishra, chief economist at Axis Bank, stated in a note that the reduction in second-half issuance duration reflects a recognition of market demand limits. “Thus, the government bond yield curve is expected to flatten slightly at the middle and long ends,” he added. Ritesh Bhusari, joint general manager for Treasury at South Indian Bank, forecasted, “We could see more flattening in the yield curve from the 10-year to the 40-year segment.”
Published on September 29, 2025.
