The market is starting to get low yield fatigue
The bond market has been living with extremely low yields over the last one year with government bonds in the maturity range of 1 to 3 years trading at levels of 3.5% to 4.5%. Up to 10 years, bond yields are in the range of 4.5% to 6.3% and over that, yields have gone all the way up to 7.2%. The yield curve is steep with spread of 250bps to 280bps over the 1 over 10-year maturity segment and to 350bps over the 1 over 30-year segment.
The bond market has been worried on inflation and the size of the government borrowing and most of the demand for bonds has been at the shorter end of the yield curve that is offering very low yields.
The low yields offered at the short end of the curve does not provide any returns to investors as there is almost no spread available over funding costs. There is a sense of fatigue for investors on the low yields offered by bonds.
Bond market is now finding that higher yields at the longer maturity segment is more profitable and with inflation coming off below 6% and government finances seeing improvement, market is getting more comfortable with long end bonds. SDLs too are finding demand with yields in the auction coming off from 7% to 6.85% and with liquidity at very high levels of over Rs 5 trillion, markets will continue to seek higher yields.
Government bonds, SDL and OIS yield movements
During last week, 6.10% 2031 yield rose by 2 bps to 6.18% while 5.85% 2030 yield increased by 2 bps to 6.17%. 5-year benchmark bond, 5.63% 2026 yield rose by 4 bps to 5.61%. 6.64% 2035 yield gained 3 bps to 6.71%. 6.57% 2033 yield remained unchanged at 6.60%. In the same line, long-term paper, 7.16% 2050 yield stood steady at 6.99%
The spread of 10-year bond over 5-year bond came down to 57 bps from 59 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined by 2 bps to 42 bps, while 30-year benchmark over 10-year benchmark spread decreased by 2 bps to 77 bps on weekly basis.
Average 10-year SDL auction cut-off declined to 6.88% from 6.91% in previous week while spread remained unchanged at 69 bps from previous week.
On weekly basis, 1-year OIS yield rose by 1 bps to 3.86% while 5-year OIS yield increased by 2 bps to 5.13%.
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