Bond yields point to tough times ahead
Market sentiment indicates that the longer term outlook is poor and returns offered by long-term bonds will continue to fall.
By TNN | Updated:
MUMBAI: Three years since the 2008 crisis, the yield curve has again taken an inverted shape, that is yields on bonds of shorter duration have shot up to above the yields offered on bonds of longer duration, indicating tough times ahead.
As of Monday’s close, while the closing yield on the most traded 10-year government securities (G-sec) was 8.24%, the corresponding number was 8.29% on the 7-year G-secs, 8.34% on 6-year and 8.31% on 5-year papers, RBI data showed.
In the regular course, the yield on the 10-year should have been higher than on papers of shorter maturity. “However, the bumpy borrowing in the short term, by the government, to meet income tax refunds, have also contributed to this phenomenon to some extent,” a bond dealer said.
An inverted yield curve is taken as an indicator of a looming slowdown. When short-term yields, a proxy for interest rates, are higher that the longterm yields, market sentiment indicates that the longer term outlook is poor and returns offered by long-term bonds will continue to fall.
Bond dealers said the yield spread between 91-day treasury bills and 10-year and 30-year G-secs have also narrowed to unusual levels.
While in the normal course, the spread between 91-day and 10-year is about 150-200 basis points, at present the same is just about 2-3 bps, indicating heightened short term uncertainty.
As of Monday’s close, while the closing yield on the most traded 10-year government securities (G-sec) was 8.24%, the corresponding number was 8.29% on the 7-year G-secs, 8.34% on 6-year and 8.31% on 5-year papers, RBI data showed.
In the regular course, the yield on the 10-year should have been higher than on papers of shorter maturity. “However, the bumpy borrowing in the short term, by the government, to meet income tax refunds, have also contributed to this phenomenon to some extent,” a bond dealer said.
An inverted yield curve is taken as an indicator of a looming slowdown. When short-term yields, a proxy for interest rates, are higher that the longterm yields, market sentiment indicates that the longer term outlook is poor and returns offered by long-term bonds will continue to fall.
Bond dealers said the yield spread between 91-day treasury bills and 10-year and 30-year G-secs have also narrowed to unusual levels.
While in the normal course, the spread between 91-day and 10-year is about 150-200 basis points, at present the same is just about 2-3 bps, indicating heightened short term uncertainty.
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