Mumbai: Surging bond yields have widened the gap between central and state bonds, and bank fixed deposits, making the former asset category an attractive entry point for long-term investors, experts said.The 10-year risk-free rate climbed to a five-month high, and closed at 6.60% Tuesday over concerns that a potential hit to revenues after the proposed GST rationalisation will lead to higher government borrowing, treasury officials said.At an annualised yield of 6.71%, the 10-year yield is 56-66 bps higher compared with similar-tenure/(5-10 year segment) fixed deposits by the two largest banks - State Bank of India and HDFC Bank."We are still in a lowering interest rate cycle and current yields - especially on the long end - present a strong investment opportunity. They are attractive compared with fixed deposits, particularly on a post-tax basis," said Vishal Goenka, co-founder, IndiaBonds.com.He expects a rally in bonds, seen in the aftermath of the first two rate reductions in FY25, to eventually resume as federal borrowing concerns abate. "Right now, yields are rising mainly due to an oversold market driven by concerns over fiscal slippage," Goenka said. "However, a rebound is expected, supported by factors such as a potential rate cut by the Federal Reserve, recent S&P upgrade and slowing credit offtake. If there is an additional 25 bps rate cut to support growth, it could also provide the added benefit of capital gains on bond investment."Between February and June, the Reserve Bank of India (RBI) reduced the policy repo rate by 100 basis points to 5.50%. 123534978Pressure on Deposit RatesAs transmission of the central bank's rate cut remains work in progress, deposit rates are expected to come down further.Surplus liquidity in the banking system amid weak credit offtake may also nudge banks to lower deposit rate to protect their net interest margin, market experts said.A choppy bond market has pushed State Development Loan (SDL) yields sharply higher, opening a rare opportunity for retail investors to earn superior returns with quasi-sovereign safety, said Venkatakrishnan Srinivasan, founder of Rockfort Fincap - a fixed-income institutional advisory firm."For those willing to hold bonds to maturity, the combination of state-backed safety and yields well above fixed deposits presents a compelling alternative. In effect, a "bad" bond market has created a "good" entry point for households seeking stable and higher income," Srinivasan said.In Tuesday’s auction, the cut-off yield on 10-year bonds of Rajasthan was at 7.49%, and even shorter-maturity issuances, such as Tamil Nadu’s six-year bond, fetched 7.00%. By comparison, the highest SBI fixed deposit rate remains capped at 6.45%. Investors have an option to take exposure to government bonds and treasury bills via debt mutual funds. Alternatively, they can also invest directly using RBI Retail Direct Scheme, central bank’s platform that facilitates investment in central and state government bonds and treasury bills for a minimum ticket size of Rs 10,000. Online bond platforms also provide such investment options with holdings in the demat format.
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