The Indian debt market saw a slight inversion in the yield curve for the first time in nearly eight years. The one-year bond traded about 0.3 basis points above the yield on the 10-year bond, as a consequence of hawkish comments from Fed chair Jerome Powell and on fears of liquidity tightening expected in April.
It all began with yields rising since Tuesday morning all over the world and in India after Jerome Powell said in his testimony to Congress that given the strong economic data, rates may have to remain higher for longer, and even be raised at a faster clip.
The US 10-yr bond yield rose to 4% on Monday after the testimony. Reacting to this news, the Indian 10-year government bond yield rose to 7.472% today. At the treasury bill auction conducted by the RBI today, the yield on the 364-day T-bill came in at 7.48%. Thereafter, the traded one-year bond, which closely follows the auction cut-off, also rose to 7.475% thus trading slightly and briefly above the 10-year bond.
| Bond yields spike |
| > India yields spike across yield-curve as Fed Chair Jerome Powell indicates higher rates, faster hikes |
| > RBI’s 364-day T-bill auction cut-off comes in at 7.48% > than 10-yr bond yld |
| > One year bond, which tracks the 364-day auction cut-off traded at 7.475% |
| > India 10-yr yield trades at 4-month highs of 7.4728% on Powell’s hawkish comments |
| > India sees yield-curve inversion with 364-day T-bill yield higher than 10-yr bond yield |
| > Near term yield spike was on fears of tight liquidity in April, more Fed & RBI rate hikes |
In bond market parlance, this is call yield-inversion, when near term bonds trade at a higher yield than longer term bonds. Yield inversion usually signals an upcoming recession, since it indicates that while markets expect rates to rise in the short run, they expect yields to fall in the longer term as the higher rates will cause an economic slowdown, even recession.
Dealers however rubbished any possibility of recession in India. The jump in the near term yields has been attributed more to an expected liquidity tightness in April as the RBI TLTRO (targeted long term repo operations) gets wound up.
Under the TLTRO announced in April 2020, banks were allowed to borrow 1-3 year money at 4%. These monies have to be paid back in April 2023 and this could create a slight liquidity tightness, dealers say. But more importantly, near-term yields are also rising because the RBI, like other emerging market central banks, may have to raise rates some more to protect the rupee, if the Federal reserve indicates three or more additional hikes.
If US near term yields rise to 5.5% (the US 1 year yld is already at 5.2%), dealers guess exporters may not want to sell their dollars as the yield in dollars is almost as attractive as the rupee yield. Also foreign fund flows into EMs like India may dry up given the high risk free return from US treasuries. This could result in pressure on the rupee, to fend off which, the RBI may be forced to raise rates. Such speculation led to the slight yield inversion today, dealers said.
Also read: India’s corporate debt market fund will help boost liquidity and confidence in the bond market
(Edited by : Pradeep John)
First Published: Mar 8, 2023 10:09 PM IST
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