10-year G-sec yields close at post covid highs
The benchmark 10 year bond, the 6.10% 2031 bond, saw yields close at its highest level since its issue in July 2021. The bond yield closed at 6.41% and the last auction saw cut off yield at 6.41% indicating that the market is pricing in higher interest rate risk on the bond. Bond market is clearly worried about the course of inflation and interest rates going forward and are increasing caution on bond investments.
The worry for the bond market is that central banks are no longer only looking at the threat to economic growth from new variants of covid, like the delta and omicron. Inflation is gaining a stronger hold on economies and given the ultra-loose monetary policy, the hold is gaining strngth.
The reversal of policy is trickly as USD trillions and trillions of bonds have been invested at ultra-low yields and rise in yields on these bonds can cause huge losses to investors, as prices fall.
Incrementally investing in bonds at lower yields may increase risk of capital and bond markets will turn cautious on further bond investments. Hence g-sec yields are likely to rise as markets increase the risk premium on yields on worries that RBI may have to start raising rates soon, following other central banks.
Global central banks turn hawkish
ECB has sounded out reducing bond purchases starting April 2021 on inflation fears.
Fed December 2021 policy-meeting highlights:
• USD 60 billion bond purchase from January 2022
• Expects 3 rate hikes in 2022, starting from March 2022
• 2 rate hikes each in 2023 and 2024
• Inflation levels projected at 2.6% and 2.3% in 2023 & 2024 respectively
• Raised GDP growth forecast to 4% in 2022 from 3.8%
• Lowered GDP growth forecast for 2023 to 2.2% from 2.5%
Rate hike by Bank of England
In the wake of high inflation, Bank of England raised main interest rate from 0.10% to 0.25% in its last meeting. The bank slashed its growth forecasts for December and the first quarter of 2022 because of Omicron.
Domestic inflation
India’s consumer inflation rose to 4.91% in Nov 21 as compared to 4.48% in previous month. During Nov’21, core inflation came in at 6.2%.
Government bonds, SDL and OIS yield movements
During last week, 6.10% 2031 yield rose by 4 bps to 6.41% while 5.85% 2030 yield increased by 4 bps 6.43%. 5-year benchmark bond, 5.63% 2026 yield gained 3 bp to 5.72%. 6.64% 2035 yield rose by 2 bp to 6.8%. 6.57% 2033 lost 7 bps to 6.65%. Long-term paper, 7.16% 2050 yield rose by 2 bp to 6.98%.
The spread of 10-year bond over 5-year bond rose to 69 bps from 68 bps in previous week. The 15-year benchmark over 10-year benchmark spread came down to 24 bps from 35 bps, while 30-year benchmark over 10-year benchmark spread declined to 57 bps from 59 bps on weekly basis.
10-year SDL auction cut-off declined to 6.85% from 6.87% in previous week while spread rose to 49 bps from 48 bps in previous week.
On weekly basis, 1-year OIS yield rose by 4 bps to 4.29% while 5-year OIS yield increased by 1 bp to 5.34%.
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