By Dharamraj Dhutia
MUMBAI (Reuters) – India’s one-year government debt yield rose above that of the 10-year note on Wednesday, following higher-than-expected cutoffs at a sale of treasury bills that briefly inverted the yield curve for the first time in nearly eight years.
The Reserve Bank of India sold 364-day notes at a 7.48% yield, the highest since October 2018.
The one-year bond yield, which trades close to the 364-day treasury bill yield, briefly rose to 7.4750% earlier in the day, while the 10-year benchmark 7.26% 2032 bond yield saw a high of 7.4728%.
The one-year note last traded above the 10-year bond in May 2015, according to Refinitiv data.
The one-year yield eased to 7.38% at close, while the 10-year ended at 7.4547%.
Movement in 1-year and 10-year bond yields https://www.reuters.com/graphics/INDIA-MARKETS/dwvkdznwkpm/chart.png
“There is limited appetite for the shorter end, which is resulting in consistent rise in T-Bill yields,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.
On Feb. 28, Reuters reported that India’s bond yield curve is likely to invert on the back of worsening liquidity deficit in India’s banking system and bets of continued rate hikes.
The 364-day T-Bill yield has jumped 58 basis points in the last six weeks amid uncertainty over interest rate hikes, while banking system liquidity moved into deficit which is expected to widen in the coming weeks.
Movement in 364-day T-bill and 10-year bond yield https://www.reuters.com/graphics/INDIA-MARKETS/dwvkdznwkpm/chart.png
The benchmark 2032 bond yield has risen only 12 bps during the same period, leading to spread compression and ultimately inversion.
India’s banking system liquidity deficit widened to over 700 billion rupees ($8.53 billion) in February, with the daily average liquidity also slipping into deficit on a monthly basis for the first time since May 2019.
“Core liquidity is declining, and surplus is falling very sharply, and the process will continue over the next couple of months,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management.
“By April, we may see even core liquidity slipping into deficit and this is a big cause for short-term rates to jump.”
Market participants said the lack of bond supply by the central government in March has been a major reason for the yields at the longer end to remain capped.
“The year-end buying from insurance companies and pension and provident funds may underpin the bonds at higher levels, and the level of 7.48%-7.50% should see some buying interest,” said VRC Reddy, treasury head of Karur Vysya Bank.
($1 = 82.0680 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Savio D’Souza, Eileen Soreng and Anil D’Silva)
