RBI action on 15th July to curb INR volatility has whacked Treasury Bills (T-bills) yields out of shape. The 91 day and 364 T-bills are trading at 10.60% and 9.70% respectively. However corporate bond yields are trading at levels below T-bill yields. Two and five year AAA rated corporate bonds are trading at levels of 10.30% and 9.80% while ten year AAA corporate bonds are trading at levels of 9.60%.
The fact that risk free money market securities are trading at higher yields than credit risk bearing corporate bonds suggest that the bond market is reacting to tight liquidity conditions rather than positioning for a fundamental shift in interest rates or credit spreads.
This anomaly of credit risk bearing bonds trading at higher yields than risk free money market securities will continue for as long as RBI keeps liquidity tight in the system.
