Bond yields may fall to 6.50% by Q4FY25, says analyst. Here’s what fixed income market investors should do

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₹2.11 lakh crore dividend to the government for the financial year 2023-2024, which was more than double the market had expected. A higher dividend amount provides a great deal of flexibility to the central government on the fiscal side and this positive surprise enthused all the markets with lower bond yields, rupee appreciating and the stock markets hitting new highs.Also Read: RBI dividend boost to help in improving budget math“The maximum impact of the higher dividend was seen at the longer end of the curve with bond markets feeling optimistic about a cut in government borrowing when the full Budget is presented in July," said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.Yields at the shorter end of the curve also came down as a result of lower borrowing in T-bills as announced last week to reduce the government surplus which may go up to ₹6 lakh crore after the transfer of the RBI dividend.

The 3 month T-bill yield has come down to 6.85% from 6.99% earlier and 3 month bank CD yields have also come down by 10-15 bps, he added.As core inflation hits an all-time low of 3.20% and the fiscal leeway available to the government with the higher than expected dividend, he believes bond yields will continue to drift lower with the favourable demand supply dynamics providing the necessary tailwind. Also Read: Goldman Sachs raises India’s GDP growth forecast to 6.7% for 2024; expects RBI repo rate cut in December quarter“We continue to believe that the global monetary tightening cycle has effectively ended and the bar of further rate hikes in the US remains high despite the continuous hawkish posturing by some FOMC members.