US labour market is extremely tight
Non-farm payroll showed that the US economy added 678,000 jobs in February, this was above the expectation of 400,000 jobs and also well above January’s figure of 481,000. The unemployment rate fell from 4% to 3.8%. Wage growth was at 5.1% yoy. Oil prices rose to multi year highs of over USD110/bbl while food and metal prices rose on supply concerns.
Wage push inflation is structural in nature while commodity price inflation can be transitory. However, with rates at record lows and extremely high levels of government debt due to covid crisis, central banks just do not have any tools to handle more crisis conditions.
RBI too is facing a tough time with INR trending towards record lows on rising oil prices and government is expected to borrow record amounts next year, justifying accommodative policy is difficult. Bond markets will find every opportunity to push yields.
Government bonds, SDL and OIS yield movements
Last week, 6.54% 2032 paper yield rose by 6 bps to 6.81% while 6.10% 2031 yield increased by 7 bps to 6.84%. The 5-year benchmark bond, 5.63% 2026 yield rose by 9 bps to 6.03%. 6.64% 2035 yield gained 13 bps to 7.15%. Long-term paper, 7.16% 2050 yield rose by 13 bps to 7.23%.
The spread of 10-year bond over 5-year bond fell to 81 bps from 83 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined to 28 bps from 22 bps while 30-year benchmark over 10-year benchmark spread increased to 40 bps from 32 bps on weekly basis.
Average 10-year SDL auction cut-off rose to 7.15% from 7.12% in previous week while spread rose to 38 bps from 34 bps.
On weekly basis, 1-year OIS yield rose by 10 bps 4.40% while 5-year OIS yield increased by 4 bps to 5.8%.
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