Key Takeaways
- State government bond yields in India hit an over six-year high, reaching 8%.
- Investor demand for state bonds has weakened, leading to higher borrowing costs.
- Indian states aim to raise over 3.6 trillion rupees through bond sales this quarter.
Borrowing costs for India’s state government bonds have surged to their highest level in over six years, reaching an 8% yield, according to market traders. This significant rise in yields reflects a combination of factors, including elevated crude oil prices and tighter liquidity conditions.
The latest bond sale saw the 9- to 10-year state bonds being sold in the 8.03%-8.10% range, marking the first time since April 2020 that yields on 10-year maturity state bonds have breached the 8% mark. Other ultra-long papers were priced between 8.14% and 8.21%.
Harsimran Sahni, associate director and head of treasury at Anand Rathi Global Finance, explained that the rise in state debt yields is due to 'elevated crude oil prices, tighter liquidity conditions, and open market sales.'
Last week, states managed to raise funds through 9- to 10-year bonds in the 7.91%-7.93% band. The benchmark 10-year 6.94% 2036 bond yield was at 7.36% on Tuesday, up from 7.19% the previous week.
The yield spread of 10-year state bonds over central government bonds has narrowed from around 75 basis points to about 65 bps in the last two months, with expectations of it remaining in the 55-70 bps range in the near term.
Indian states are targeting bond sales of over 3.6 trillion rupees for this quarter, following a successful first half of the fiscal year where they raised 5 trillion rupees.
Sahni added, 'The rise in state debt yields reflects a combination of elevated crude oil prices, tighter liquidity conditions, and open market sales.'
The rise in state debt yields reflects a combination of elevated crude oil prices, tighter liquidity conditions, and open market sales.
Harsimran Sahni, Associate director and head of treasury at Anand Rathi Global Finance
