Experts say this trend of declining liquidity and inversion of the yield curve is likely to continue for some time. (Representational photo: Reuters)
An inversion of the bond yield curve is generally considered an indicator of an impending recession; Does it mean the same for India? check details
For the first time since May 2015, India’s bond yield curve saw an inversion, with the 364-day Treasury bill cutoff yield briefly above the benchmark 10-year bond. This happened after the yield on 364-day notes jumped to 7.48 per cent, the highest since October 2018.
The RBI sold 364-day notes on Wednesday at a yield of 7.48 per cent, while the 10-year benchmark 7.26 per cent 2032 bond yield saw a high of 7.4728 per cent and ended at 7.4547 per cent.
In May 2015, the 1-year note last traded above the 10-year bond.
What are bonds and their yields?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (usually corporate or government). Bonds are used by companies, municipalities, states and sovereign governments to finance projects and operations. According to Investopedia, the owners of bonds are the debtors or creditors of the issuer. In India, the 10-year Government Securities (G-Sec) is the benchmark bond.
Yield is the return on the bond. For example, if a person buys a bond at Rs 5,000 at a coupon rate (or fixed interest rate) of 5 per cent per annum, he will get a return of Rs 250 per year. If for some reason the price of the bond falls to Rs 4,000, the return will be higher in percentage terms, given the same coupon rate and time period. Therefore, bond prices and yields move in opposite directions. When bond prices fall, yields rise and vice versa.
What is bond yield curve inversion?
Bond yield curve inversion is a situation when the yield of a bond of shorter duration (say 365 days) is higher than the yield of longer duration (say 10 years). On Wednesday, India’s 1-year government bond yield edged higher than the country’s benchmark 10-year bond.
Why has India’s bond yield curve inverted?
The reversal occurred in India due to a higher than expected cut on the sale of treasury bills, which in turn was triggered by a reduction in liquidity in the banking system.
“This trend of declining liquidity and inversion of the yield curve is likely to continue for some more time,” said VK Vijayakumar, chief investment strategist, Geojit Financial Services.
What does this mean for India?
Vijayakumar said that the inversion of the bond yield curve is generally considered an indicator of an impending recession. But, this relationship between yield curve inversion and recession is found only in developed countries and not in developing countries like India.
“This is not going to have any impact on India’s GDP growth in FY24,” he added.
Is this happening only in India?
No. Developed countries, mainly America are facing this. In the US, the yield on two-year Treasury notes hit 5.08 per cent on Wednesday, the highest level since 2007. Crucially, long-term yields remained in check, with the 10-year rate below 4 percent and the yield on the 30-year bond low.
According to forex traders, rising interest rates in the US are likely to strengthen the dollar against the rupee, and this could result in Indian imports becoming costlier.
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