PSU Banks led by Union Bank rally up to 7% as bond yields cool off sharply

Shares of India's state-run lenders have surged as much as 7% on Wednesday, April 8, following a sharp cool off in India's government bond yields.

The PSU Bank index is trading with gains of 5% on Wednesday trading, led by Union Bank of India, Bank of Baroda and Bank of India, which are trading with gains between 6% to 7% each, followed by Canara Bank, Indian Bank, UCO Bank, Indian Bank, and PNB, which have seen gains of 5% to 6%.

Shares of State Bank of India

, India's largest lender, are also trading with gains of up to 4%.

India's 10-year bond yield has cooled off sharply by nearly 15 basis points on Wednesday to 6.91%, in response to a sharp upmove in risk assets triggered by the announcement made by US President Donald Trump of a two-week pause to hostilities in Iran and reach an agreement on various points of contention.

PSU Banks hold a large portfolio of government securities. Most of these are generally held under Hold-to-Maturity (HTM) format, while a significant chunk is also held under the Available For Sale (AFS) form.

According to an IIFL Capital note, a 25 basis points rise in short-term bond yields impacts the profit after tax (PAT) for lenders by 0.1% to 0.7%, while a 50 basis points rise in medium-term bond yields could impact the networth of lenders by 0.3% to 0.6%.

All constituents of the PSU Bank index are trading with gains.