G-Sec and Money Market Yields Rise in December Amid Tight Liquidity and Strong Credit Demand

Mumbai, Jan 10: Over the month of December 2025, government securities (G-Sec) and money market yields witnessed a broad-based upward movement across maturities, reflecting shifts in liquidity and credit demand dynamics.

G-Sec Yields:

The G-Sec yield curve experienced a parallel upward shift compared to November 2025. Yields increased across tenures, with the 1-year and 3-year G-Sec yields rising by 13 bps to 6.07%, while the 10-year yield rose by 9 bps to 6.58%. Long-term AAA PSU bonds also saw an increase, with spreads widening at the short end (1–3 years) by approximately 12 bps, indicating investors demanded a higher risk premium relative to sovereign bonds. Medium-term tenures (5–10 years) showed moderate increases, while the 7-year spread narrowed slightly by 3 bps.

The upward movement in long-end yields was attributed to reduced bank participation in the market. With banks holding excess SLR positions and credit demand increasing due to the recent repo rate cut and government stimulus through Income Tax and GST reductions, banks preferred lending over parking funds, leading to a decline in bond prices and a rise in yields.

Money Market Yields:

Short-term instruments also reflected tight liquidity conditions. Certificates of Deposit (CDs) rose across tenures, with the 1-month CD yield increasing by 23 bps to 6.19%, while T-bill yields saw a reduction at the shorter end due to the rate cut, falling 15–40 bps. Spreads between CDs and T-bills widened across all tenures, signaling higher short-term borrowing costs amid system liquidity constraints caused by advance tax outflows and RBI interventions to stabilize the rupee.

Summary:

1. Broad-based upward movement in G-Sec yields, driven by lower bank demand and rising credit activity.
2. Short-term money market yields increased, while T-bill yields softened slightly due to policy rate cut.
3. Widening spreads at short-term tenures reflect higher risk premiums and tighter liquidity conditions.
4. Overall, investors remain confident in the long-term stability of AAA PSU issuers, while near-term borrowing costs are elevated.

Source: RBI, Bloomberg

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