In the current economic scenario, all major government bonds saw yields rise sharply indicating a structural shift globally. The major cause of this phenomena can be attributed to elevated global inflation that has compelled central banks to hike policy rates. Since past one year, yield movement has been sharp leading to huge losses for investors in government bonds.
10-year US treasury yield rose to 4.16% from 1.46% while 10-year India gilt yield moved up to 7.47% from 6.33%.
The Federal Reserve raised the target range for the federal funds rate by 75bps to 3.75%-4% during its November 2022 meeting. Since May 2022, RBI has hiked policy repo rate by 190 bps to 5.90% in the wake of high inflation and rupee depreciation. In the same line, Bank of England raised interest rate by 75 bps to 3% in its last meeting as the country's inflation touched 40 -year high at 10.1% in Sep 2022.
During covid pandemic, government borrowing increased along with low policy rates to fight the economic downturn. Consequently, systemic liquidity rose which has caused an uptrend in inflation.
From the above chart it can be clearly seen that global inflation has exhibited sharp uptrend in last one year. Apart from liquidity infusion by central banks, geopolitical issues such as Russia-Ukraine war also ignited rise in crude oil price which spurred inflation rise.
Government bonds, SDL and OIS yield movements
10-year benchmark 7.26% 2032 yield rose by 5 bps to 7.47% while 6.54% 2032 yield increased by 5 bps to 7.5%. The 5-year benchmark bond, 6.79% 2027 yield increased by 6 bps to 7.44%. 3-year benchmark 5.22% 2025 yield increased by 25 bps to 7.29%. Long-term paper, 6.99% 2051 yield increased by 8 bps to 7.61%. 40-year paper, 7.40% 2062 yield increased by 12 bps to 7.62%.
The spread of 10-year bond over 5-year bond came down to 3 bps from 4 bps as compared to the previous week. The 15-year benchmark over 10-year benchmark spread rose to 11 bps from 8 bps while the 30-year benchmark over 10-year benchmark spread increased to 14 bps from 11 bps on a weekly basis.
Average 10-year SDL auction cut-off declined to 7.82% from 7.84% in previous week while spread increased to 42 bps from 40 bps.
On a weekly basis, 1-year OIS yield rose by 7 bps 7.02% while the 5-year OIS yield increased by 12 bps to 6.97%.
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