Gsec yields have to contend with many factors including rate hikes by RBI, high inflation, large government bond supply and tightening system liquidity. Global fears of inflation and central bank extreme steps are also factors that will contribute to market instability.
RBI rate hike of 40bps last week is in anticipa\tion of a high inflation print for April 22. CPI inflation could come in at over 8% against 6.95% seen in March given sharp rise in prices of energy and other consumables. Inflation will stay elevated for a longer period of time given global supply disruptions and the excess liquidity given by central banks at record low rates of interest.
Normalising rates and liquidity smoothly will not be easy and any extreme steps will cause huge market volatility.
The record bond supply from the government at a time of high inflation, rate hikes and tightening liquidity will keep gsec yields and the yield curve volatile for a while to come.
Government bonds, SDL and OIS yield movements
Last week, 10-year benchmark 6.54% 2032 paper yield rose by 31 bps to 7.45%. The 5-year benchmark bond, 6.79% 2027 yield rose by 44 bps to 7.27%. 6.64% 2035 yield increased by 30 bps to 7.63%. Long-term paper, 6.99% 2051 yield increased by 29 bps to 7.71%.
The spread of 10-year bond over 5-year bond declined to 18 bps from 31 bps in the previous week. The 15-year benchmark over 10-year benchmark spread remained steady at 19 bps while the 30-year benchmark over 10-year benchmark spread decreased to 26 bps from 28 bps on a weekly basis.
15-year Andhra Pradesh SDL auction cut-off stood at 7.45%.
On a weekly basis, 1-year OIS yield rose by 118 bps to 6.23% while the 5-year OIS yield increased by 55 bps to 7.16%.
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