Rate uncertainty: Yields of 1-yr govt bonds at 10-yr level

Mumbai: Yield inversion in the government securities (G-Sec) market, that started a couple of weeks ago, percolated into the extreme short end of the spectrum on Wednesday. Yields on 364-day treasury bills (T-bills) rose to 7.39%, just 3 basis points (100bps = 1 percentage point) less than 10-year G-Sec’s at 7.42%.
This is mainly due to the tight liquidity situation in the money market and uncertainty over interest rates in the short term, economists and bond market players said.
T-bills are a form of sovereign bonds through which the government raises money for less than a year. In Wednesday’s T-bill auction, while the cut-off for 364 days was 7.39%, the corresponding figures for 182 days was 7.3% and for 91 days 6.94%. Just a month ago, the yields were 6.98%, 6.93% and 6.56%, respectively, according to RBI data.
A yield inversion happens when bond traders and investors expect uncertainty in the short- to medium-term and thus prefer to park their money in long-dated securities. Since they prefer to sell short- and medium-tenure bonds, prices of these securities fall and yields rise. On the other hand, the buying of long maturity securities leads to rise in bond prices, which result in fall in yields.
Last week, the yield on 10-year G-Secs were a couple of basis points more than the yield on 30-year papers. Economists and bond market players expect this situation to continue for a while.
“There is a squeeze in liquidity in the market,” said Bank of Baroda chief economist Madan Sabnavis.
“March will be an exceptional month as there will be redemptions, advance tax payments, states hastening their borrowings and also year-end demand from corporates. This will keep rates in the higher range for sure,” he said in a note. “The spectre of inflation remaining over 6% in February also has cast a shadow.”