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There is a new masked vigilante in town and they don’t deal with bats but bonds. Authorities typically are not enamoured by vigilantes whether it be the Batman in Gotham City or the bondmen in Mumbai.
Bond vigilantes are not an India only phenomenon in these times. As we noted the past week, in the US, despite Federal Reserve chair Jerome Powell’s assurances that the central bank will keep the party going, treasury yields had spiked to as much as 1.74 percent before dropping to 1.67 percent. Bank of America now forecast that this could be as high as 2.15 percent by the end of the year, forcing the US central bank to act.
In India, the 10-year government security has been stubbornly trading above 6 percent for some time as bond market participants don’t seem to buy RBI’s guidance that it will continue the accommodative stance of monetary policy well into the next year.
A brief digression into history here: The term bond vigilante was coined by economist Edward Yardeni in 1984. "If the fiscal and monetary authorities won't regulate the economy, the bond vigilantes will," he is believed to have told Bloomberg.
Simply put, bondholders fear inflation as it erodes the value of their bonds and they sell bonds which in turn drives up borrowing costs for governments prompting them or central banks to act. Such is the power of bond vigilantes that in the 1990s, an advisor to US President Bill Clinton, James Carville had to say this: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Perhaps, the Reserve Bank of India wants to show that it is not intimidated. In its state of the economy report, it has scolded bond vigilantes saying that they could “undermine the economic recovery and unsettle buoyant financial markets.”
But nevertheless its teeth are on edge after having to devolve bond auctions at least five times the past month. Sample this para: “…calming forward guidance from central banks also hides a tension - their nerves can fray if they see a painfully extracted economic revival, and financial stability built at the altar of regulatory forbearance, threatened by adventurism. Will they engage in more aggressive actions? After all, they hold the Brahmastra - asset purchases.”
Manas Chakravarty has waded through the sparkling prose and condensed the takeaways. You can read all about the Goldilocks economy getting mauled by bond bears here.
Here are today’s investment insights from our research team:
Is it time for retail investors to board EaseMyTrip flight, post tepid listing?
Emmbi Industries: A compelling value buy
Tata Metaliks: Preferred stock to play higher allocation for water infrastructure
What else are we reading today?
RBI says demand gets a push from falling household savings rate and higher borrowing
Universal Basic Income — The Bengal model
Accenture’s results show big IT companies can weather pay hikes for now
Interview | Our aim is to become a pan-India cement company, says N Srinivasan of India Cements
Apollo-Athene: the new Berkshire Hathaway? (republished from the FT)
Technical picks: Aarti Drugs, M&M Finance, Nifty and Grasim (These are published every trading day before markets open and can be read on the app)
Ravi Krishnan
Moneycontrol Pro
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