The yield on India’s one-year government debt rose above the 10-year bond yield on Wednesday after higher-than-expected breaks in Treasury bill sales, inverting the yield curve for the first time in nearly eight years.
The Reserve Bank of India sold 364-day notes at a yield of 7.48%, the highest since October 2018, while the benchmark 10-year 2032 bond yielded 7.26% at 7.46%. The 1-year note last traded above the 10-year note in May 2015.
“Short-term appetite is limited, leading to sustained growth in T-Bill yields,” said Naveen Singh, Head of Trading, Primary Dealership, ICICI Securities.
On February 28, Reuters reported that India’s bond yield curve is inverting on the back of worsening liquidity shortages in India’s banking system and continued rate hikes.
The 364-day T-bill yield has risen 58 basis points in the past six weeks amid uncertainty about a rate hike, while banking system liquidity has shifted to a deficit and is expected to widen in the coming weeks.
The yield on the benchmark 2032 bond rose only 12 bps over the same period, leading to spread compression and eventual inversion.
India’s banking system’s liquidity deficit exceeded 700 billion rupees ($8.53 billion) in February, with average daily liquidity running into a monthly deficit for the first time since May 2019.
“The underlying liquidity is going down and the surplus is going down very sharply and that process will continue for the next two months,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management.
“In April, we may even see a core liquidity deficit, and that’s a big reason for short-term rates to jump.”
Market participants said the lack of central government bond offerings in March was the main reason long-term yields were limited.
“Year-end buying from insurance companies and pension and provident funds is likely to keep bonds higher, and there should be some buying interest at 7.48-7.50%,” said VRC Reddy, head of treasury at Karur Vysya Bank.
(Except for the headline, this story was not edited by NDTV staff and was published on a syndicated channel.)
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