26 Dec 2022

Long term bond yields overpriced and need to rise

Long term g-sec yields are yet to fully price in uncertainty on inflation, global risk factors and high fiscal deficit. Yields need to rise to give investors any cause for comfort.

author dp
Team INRBonds
Share via:LinkedIn LogoTwitter logo

The 5, 10,15 and 30-year g-sec yields are in a range of 7.20% to 7.5% and are almost pricing in end of a rising interest rate cycle and a fall in economic growth ahead. However, inflation expectations both in India and globally are still high and central banks and governments are struggling with the effects of years of ultra-loose monetary and fiscal accommodation, the withdrawal effects will linger on for a long while to come. Hence, long term bond yields will have to price in higher uncertainty risk premium and rise accordingly.

 

Government bonds, SDL and OIS yield movements

10-year benchmark 7.26% 2032 yield rose by 4 bps to 7.32% while 6.54% 2032 yield increased by 4 bps to 7.36%. The 5-year benchmark bond, 6.79% 2027 yield increased by 7 bps to 7.23%. 3-year benchmark 5.22% 2025 yield increased by 1 bp to 7%. Long-term paper, 6.99% 2051 yield rose by 3 bps to 7.45%. 40-year paper, 7.40% 2062 yield increased by 4 bps to 7.47%.

The spread of 10-year bond over 5-year bond declined to 9 bps from 12 bps as compared to the previous week. The 15-year benchmark over 10-year benchmark spread decreased to 8 bps from 12 bps while the 30-year benchmark over 10-year benchmark spread declined to 13 bps from 14 bps on a weekly basis.

Average 10-year SDL auction cut-off rose to 7.64% from 7.57% in previous week while spread rose to 32 bps from 31 bps.

On a weekly basis, 1-year OIS yield rose by 6 bps to 6.71% while the 5-year OIS yield increased by 12 bps to 6.40%.

We would love to hear back from you. Please Click here to share your valuable feedback