It was previously reported that India’s bond yield curve is likely to invert on the back of worsening liquidity deficit in India’s banking system and continued rate hikes
The benchmark 1-year government bond yield on Wednesday rose above the 10-year bond yield for the first time in nearly eight years, reported Reuters. This is after higher-than-expected cut-offs at a treasury bills sale. According to the report, the Reserve Bank of India (RBI) sold a one-year government bond at a 7.48 per cent yield on Wednesday.
On the other hand, the 10-year benchmark 7.26 per cent 2032 bond yield was sold at 7.46 per cent. According to the news agency, the last time the one-year bonds traded above the 10-year bond was in May 2015.
Treasury bills or T-bills, which are money market instruments, are short-term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 days, 182 days, and 364 days.
It was previously reported that India’s bond yield curve is likely to invert on the back of worsening liquidity deficit in India’s banking system and continued rate hikes.
Naveen Singh, head of trading at ICICI Securities Primary Dealership told Reuters, “There is limited appetite for the shorter end, which is resulting in consistent rise in T-Bill yields.”
According to the report, due to uncertainty over interest rate hikes and widening banking system liquidity deficit 1-year government bond yield has jumped 58 basis points in the last six weeks. The benchmark 10-year government bond yield has risen only 12 basis points during the same period.
In February, the liquidity deficit in India’s banking sector reached above Rs 700 billion ($8.53 billion), and the monthly average liquidity fell into deficit for the first time since May 2019, the report added.
“Core liquidity is declining, and surplus is falling very sharply, and the process will continue over the next couple of months…By April, we may see even core liquidity slipping into deficit and this is a big cause for short-term rates to jump,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management.
The central government’s lack of issuance of bonds in March, according to market participants, the report said, has been a crucial factor in the longer-term yields remaining constrained.
“The year-end buying from insurance companies and pension and provident funds may underpin the bonds at higher levels, and the level of 7.48 per cent – 7.50 per cent should see some buying interest,” said VRC Reddy, treasury head of Karur Vysya Bank.
A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) that borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.