Mata Securities India Pvt Ltd | SEBI Registered Research Analyst | Reg. No. INH000022668 | SEBI Registered MF Distributor | ARN-0158
October’s losses spread to every category beyond the shortest end of the curve. Every category from short duration outwards posted negative one-month returns, and the losses in Long duration, Gilt, Medium-to-Long and Dynamic bond funds were much larger than in September. This time the pressure also reached Money Market, Ultra-Short and Low-duration funds, which earned well below Overnight and Liquid funds as certificate of deposit and commercial paper yields rose sharply. Only Overnight, Liquid and Arbitrage funds delivered returns close to their usual levels.
Overall, October showed how quickly the debt market reprices when liquidity, not just the policy rate, is tightened, and the early-November fall in yields showed how quickly sentiment can turn when crude falls. The October CPI print on 12 November and the MPC decision on 4 December are likely to decide whether the fall in yields can hold against domestic tightening, with US–Iran talks and crude the main global risks. Until these clear, accrual remains the anchor of debt portfolios, with arbitrage funds for tax-efficient parking.
Short-term rates rose across the board. The call rate, which traded below the SDF rate in early September, moved above the repo rate by mid-October, moving from below the SDF rate to above the repo rate in about six weeks. CD rates rose the most: banks returned to the CD market for funding once the surplus disappeared and the daily CRR requirement was tightened, and three-month CD rates rose 126 bps. CP rates rose almost as much, while three- and six-month T-bill yields rose 41–59 bps as markets priced in further rate hikes. The RBI also rejected all bids at the T-bill auction on 21 October, signalling discomfort with higher short-term yields.
Corporate bond yields rose with gilts in October, but spreads moved in opposite directions by maturity. The three-year AAA spread narrowed from about 148 bps to 139 bps. Short-dated gilt yields rose the most from tighter liquidity and the RBI’s ₹25,000 crore OMO sale, conducted on 13 October, which sold bonds maturing in 2030–33. The five-year spread widened from about 125 bps to 133 bps as corporate yields rose faster than gilts. AA and A-rated bonds followed the same pattern. Three- and five-year AAA paper now yields well above 8%, while fresh issuance stayed low. This differs from September, when spreads narrowed at both maturities.
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