T-bill yields fall back below 10-year bond
2 min read . Updated: 15 Mar 2023, 10:14 PM IST
PremiumAccording to traders, the fall in short-term yields tracks the movement in the 2-year US treasury yield, which fell by nearly 100 basis points.
MUMBAI : On this week’s sale, the yield on 364-day security was fixed lower than the yield on the 10-year bond, reversing its upward trend over the past few weeks.
At Wednesday’s auction, worth ₹39,000 crore, cut-off yields set for 91-day and 182-day T-bills were 10-12 basis points lower than those set at previous week’s sale. Cut-off yield for the 364-day T-bill was set 17 bps lower at 7.31 %. Bond prices and yields move inversely.
The 10-year government bond fell 27 bps to close at 7.34% on Wednesday.
According to traders, the fall in short-term yields tracks the movement in the 2-year US treasury yield, which fell by nearly 100 basis points.
“The rising trend in short term rates with high inflation, less liquidity and March factor reversed suddenly due to SVB collapse and its possible fall out causing systemic risk started pricing a 100 bps cut in Fed rates by next year. This saw 1 year T-bill cutoffs dropping by 18 bps to 7.30," said Gopal Tripathi, head of treasury, Janalakshmi Small Finance Bank.
Over the past 2 weeks, the yield on the 364 day T-bill has been rising higher than the 10-year bond, signalling yield curve inversion. When short-term returns on the securities are higher in the long run, the yield curve starts inverting. This suggests that the market is becoming more pessimistic about economic prospects for the near future.
Since January, the yield on the 364 day T-bill has jumped by 39 basis points.
According to traders, the yield curve inversion occurred because of a worsening liquidity deficit at the end of the year and expectations of continuing rate hikes.
“After a prolonged phase of rising rates on the T-bill auctions until last week, the cut-offs have come down though still remain high," said Madan Sabnavis, economist, Bank of Baroda. “The squeeze in liquidity has eased post the VRR held by RBI last week which induced funds of around ₹82,000 crore. The advance tax payments due at this time was expected to put pressure on liquidity as would be the customary year-end demand for funds. Hence, rates will remain volatile in the coming two weeks with about ₹12,000 crore of LTRO redemption also falling due next week," he added.
The Reserve Bank of India (RBI) conducted a 14-day variable rate repo (VRR) auction on 10 March to inject up to ₹1 lakh crore into the banking system after the banking system liquidity deficit widened to over ₹70,000 crore rupees in February.RBI has maintained that it would continue to resort to variable rate repos and reverse repos as and when necessary. This will help the market tide over temporary mismatches in liquidity conditions.