India Bond Traders Seek Buybacks as Yields Climb Despite Switch

Why It Matters

Rising yields increase borrowing costs for the government and corporates, tightening fiscal flexibility and complicating monetary policy transmission.

Key Takeaways

• 10‑yr yield at 6.6878%, near 6.70‑7.00% range.
• Govt swapped ₹755 bn of FY27 bonds for long‑term notes.
• Traders urge buybacks to offset supply‑demand gap.
• Yield spread over repo rate widened to >150 bps.
• Forecast 10‑yr yield reaching 6.80% by March.

Pulse Analysis

The recent debt‑switch, in which the Indian Treasury exchanged ₹755 billion of next‑year bonds for longer‑dated securities, was intended to smooth the fiscal calendar and reduce near‑term borrowing needs. However, the move coincided with a pronounced supply‑demand mismatch in the sovereign market, pushing the 10‑year benchmark yield to 6.6878%. Investors have shown tepid appetite for new issuance, while the government’s aggressive borrowing schedule continues to flood the market, eroding the gains from the switch and widening the yield spread over the policy repo rate to over 150 basis points.

Buybacks have emerged as a preferred tool to counteract the excess supply. Treasury officials and market participants argue that deploying the government’s cash balances to retire FY27 bonds could restore confidence and lower yields. The Reserve Bank of India’s record‑size purchases have provided a floor, but they have not fully offset the upward pressure from heavy issuance. A narrower supply curve would likely compress the 10‑year yield back toward the lower end of the 6.70‑7.00% band, easing financing costs for both the sovereign and corporate borrowers and supporting the transmission of the central bank’s policy easing.

Looking ahead, analysts at Tata Mutual Fund and ICICI Securities project the 10‑year yield could climb to 6.80% by March if the supply imbalance persists. Such a trajectory would keep borrowing costs elevated, potentially prompting the government to accelerate its buyback programme or adjust its issuance calendar. For investors, the widening spread signals heightened risk premia, while for policymakers it underscores the need for coordinated fiscal‑monetary actions to maintain market stability and sustain economic growth.

India bond traders seek buybacks as yields climb despite switch

Reuters · Feb 13 2026, 05:36 PM IST

Indian bond market participants say that the market will need further support, particularly via buybacks, to cool yields significantly, after government bonds surrendered the gains triggered by a surprise debt switch.

The 10‑year benchmark bond yield was at 6.6878 % on Friday, up nearly 5 basis points from the day’s low after the government switched bonds worth ₹755 billion ($8.3 billion) maturing next year with long‑term notes held by the central bank.

Switch operations are part of the government’s debt‑management strategy, and the latest one has lowered repayment and borrowing needs for the next fiscal year.

Concerns over a demand‑supply imbalance in the bond market have pushed the 10‑year yield to levels seen more than a year earlier, before the central bank started easing policy.

“Supply is a big concern in the current environment and if there is a cash surplus, the government should go for buybacks, which would reduce the pressure on next year’s borrowing,” said VRC Reddy, treasury head at Karur Vysya Bank.

Bond yields have risen due to weak demand from investors and hefty supply, dampening the impact of steep policy‑rate cuts on the economy. Record bond purchases by the central bank have also not been enough to assuage the market.

10‑YEAR YIELD TO STAY ELEVATED

Heavy government borrowing could keep the yield on long‑term bonds under pressure in the coming months, said Murthy Nagarajan, head of fixed income at Tata Mutual Fund. He expects the 10‑year yield to rise to 6.80 % by March.

The spread of the 10‑year bond over the policy repo rate – the premium investors demand for holding longer‑duration debt – has widened to over 150 bps from 15 bps a year ago.

Despite an already steep yield curve, a further rise cannot be ruled out, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

“Unless government deploys its cash balance to buy back some FY27 bonds now, sentiment may remain adverse in the bond market. We continue to expect the benchmark 10‑year bond yield to trade in 6.70 %‑7.00 % range near term,” Upadhyay said.

($1 = 90.5290 Indian rupees)