Govt bond yield curve to flatten more as long-term rates fall, treasury officials say

The curve is the flattest in 9 months, with the unfold between the central financial institution coverage fee and benchmark bond yield easing to 50 foundation factors on Monday, from 90 bps in October.

The final time the unfold was in unfavorable territory was in March 2015, LSEG knowledge confirmed.

India’s 10-year bond yield fell to inside a whisker of seven per cent on Monday, whereas the repo fee is at 6.5 per cent.

The in a single day fee, which is anchored to the coverage fee, has averaged in 6.65 per cent-6.80 per cent within the final 4 months.

A flattish yield curve might result in elevated mis-pricing of danger, stated merchants.

“With yields trending downwards, it’s anticipated the 10-year benchmark bond yield might decline to six.50 per cent over the subsequent six months, with a excessive probability of it falling beneath the repo fee earlier than any fee lower,” stated Arun Srinivasan, head of mounted earnings at ICICI Prudential Life Insurance coverage.

Yields for bonds above 10 years have fallen amid sturdy demand from native and international patrons, with the latter including to purchases forward of India’s inclusion in JPMorgan’s index.

Overseas buyers have purchased over 800 billion rupees ($9.68 billion) in authorities debt since Sep. 22, when the inclusion was introduced.

In distinction, short-term charges have remained elevated because of tight liquidity situations and a hawkish stance from the central financial institution, which signalled that easing will solely be thought-about when inflation falls near the 4 per cent goal in a sustainable method.

Sustained tightness in liquidity, constructive view on inflation and beneficial demand-supply dynamics for longer-term bonds have led to flatness, stated Soumyajit Niyogi, a director at India Scores & Analysis.

“We might see longer-duration bond yields drift additional decrease within the new monetary yr and the unfold might contract extra,” stated Vijay Sharma, senior govt vp at PNB Gilts.

Nonetheless, some don’t count on this to proceed for lengthy because the central financial institution might not be snug permitting the 10-year yield to fall beneath the 6.60 per cent-6.65 per cent degree, stated a international financial institution treasurer.

As yields fall, native banks could promote the surplus authorities bonds they’re holding, the official stated.

Banks have to carry 18 per cent of their deposit base because the statutory liquidity ratio however are holding greater than that.