10 Apr 2022

G-sec yields soar as bond markets worry over rate hikes, supply, inflation and liquidity

Owing to outcomes of RBI MPC meeting last week, government bond yields soared on multiple market worries. Although the central bank kept repo rate unchanged, it indicated rate hikes in coming months with withdrawal of excess liquidity. RBI’s stance on monetary policy will turn to hawkish from current accommodative..

author dp
Team INRBonds
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Salient features of RBI MPC outcomes 

Ø  The newly introduced Standing Deposit Facility (SDF) rate will be 25 bps below the policy rate i.e 3.75% at present. SDF will be floor of LAF corridor.

Ø  The liquidity measures offered in the view of corona pandemic will be withdrawn in a gradual and non-disruptive manner from this year.

Ø  Inflation is projected at 5.7% in 2022-23 while GDP growth rate has been projected at 7.2% for FY23.

Ø  The present limit under Held to Maturity (HTM) category for banks has been increased from 22% to 23% of NDTL till March 31, 2023.

Impact on G-sec yields

Given higher market borrowing for FY23, higher inflation forecast and possible rate hike, g-sec yields will move up sharply at the longer end of the curve. The whole g-sec yield curve will shift up with a flattening bias.

G-sec auction cut-off

During government bond auction on 8th April, 5.74% GS 2026 cut-off yield stood at 6.42% while 6.67% GS 2035 cut-off yield stood at 7.32%. Long-term paper 6.99% GS 2051 yield came in at 7.38%. Floating Rate Bond 2028 cut-off yield stood at 5.20%.       

Government bonds, SDL and OIS yield movements

Last week, 6.54% 2032 paper yield soared by 28 bps to 7.12% while 6.10% 2031 yield increased by 30 bps to 6.86%. The 5-year benchmark bond, 6.79% 2027 yield jumped by 27 bps to 6.6%. 6.64% 2035 yield rose 18 bps to 7.16%. Long-term paper, 6.99% 2051 yield decreased by 13 bps to 7.4%.

The spread of 10-year bond over 5-year bond rose to 52 bps from 51 bps in previous week. The 15-year benchmark over 10-year benchmark spread decreased to 22 bps from 30 bps while 30-year benchmark over 10-year benchmark spread decreased to 28 bps from 43 bps on weekly basis.

On weekly basis, 1-year OIS yield rose by 25 bps 4.73% while 5-year OIS yield increased by 21 bps to 6.18%.

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