Domestic Inflation surged to 6-month high
India's retail inflation climbed to a six-month high level at 6.30% on yearly basis in May 2021 from 4.23% in previous month. The rise has been driven by higher food, fuel and energy prices. In the same line, Consumer Food Price Index (CFPI) experienced a sharp rise to 5.01% in May 2021 against 1.96% in April 2021. Core inflation also rose to 6.6% in May 2021 from 5.4% in April 2021.
US CPI inflation surge in May 2021
US CPI inflation for May 2021 saw the largest jump in 13 years at 5.1% while core CPI came in at 3 decades high of 3.8%. Fed officials are still downplaying inflation spike but have started to talk of tapering bond purchases in view of inflation and economic recovery. US 10-year treasury yields are hovering at around 1.5%, up by 100 bps from lows seen in 2020.
The guidance given by steel producers and their supply chain in recent times suggest that a commodity price boom will continue for a while. Other commodity producers too are bullish on commodity prices including agri commodities.
RBI 6% target on 10-year g-sec is misplaced if inflation spikes
RBI devolved around 70% of the Rs 140 billion 5.85% 2030 g-sec auction on to the primary dealers who underwrite the government bond auction at a yield of 5.99%. The last few auctions of this bonds has seen devolvement and even cancellation of the auction, as RBI firmly held its 6% target. The central bank is holding the 10 year bond yield, as it does not want to send signals that interest rates can rise in the economy.
Given an over optimistic 5.1% inflation forecast, RBI holding 10 year bond yield at 6% is a huge market risk. A sustained rise in commodity prices with a consumption and investment boom will cause inflation to spike and bond investors will be hurt badly as real returns, which are inflation adjusted, turn deeply negative.
Commodity Price | 1-year change (%) |
Copper | 80% |
Aluminium | 62% |
Zinc | 50% |
Nickel | 38% |
Steel | 48% |
Brent Crude | 90% |
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield declined by 2 bps to 6.01% while the 5.77% 2030 yield decreased by 6 bps to 6.14%. 5-year benchmark bond, 5.22% 2025 yield came down by 8 bps to 5.26%. 6.57% 2033 yield declined by 6 bps to 6.52%. Long-term paper 7.16% 2050 yield lost 4 bps to 6.93%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 75 bps from 69 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined to 51 bps from 55 bps while 30-year benchmark over 10-year benchmark spread decreased to 93 bps from 94 bps.
Average 10-year SDL auction cut-off declined to 6.81% from 6.84% during previous week. Consequently, spread stood at 80 bps as compared to 82 bps during previous week.
On weekly basis, 1-year OIS yield came down by 4 bps to 3.69% while 5-year OIS yield decreased by 8 bps to 5.06%.
We would love to hear back from you. Please Click here to share your valuable feedback