On March 8, the yield on one-year government bonds rose higher than that of the 10-year note, following higher-than-expected cut-offs for the 364-day Treasury Bill sale, thus briefly inverting the yield curve for the first time since 2015.
The one-year bond yield, which trades around the 364-day Treasury Bill yield, briefly rose to 7.48 percent earlier in the day. The 10-year benchmark 7.26 percent, 2032 bond yield was also at 7.48 percent. The Reserve Bank of India (RBI) sold the 364-day notes at 7.48 percent yield, the highest since October 2018.
According to data from Refinitiv, a global financial data provider, the one-year note last traded above the 10-year bond eight years back -- in May 2015.
What does this indicate for the economy? Is this yield inversion signalling an economic slowdown? Is there a possibility of any recession ahead? Here’s an explainer.
What does bond yield mean?
Yield is a general term that relates to the return on the capital you invest in a bond. Price and yield are inversely related. As the price of a bond goes up, its yield goes down, and vice-versa.
What is yield inversion?
A yield inversion occurs when the yield on long-term bonds is lesser than that on short-term bonds. An inverted yield chart indicates that long-term bonds, like the 10-year government bonds, are offering a lower pay-out compared to short-term notes, like one-year notes.
Also Read: Short-term yields may rise, signalling growth slowdown, say experts
Is India the only country seeing yield inversion?
According to WorldGovernmentBonds.com, a global government bond-monitoring platform, 32 countries, other than India, are facing inverted yields on government bonds. They include the US, Germany, France, and Qatar.
Australia, Turkey, and Spain are some of the countries with partial inversion curves. Countries with minimum yield inversion include Brazil, South Africa and Bahrain.
Does it indicate a recession?
Industry experts expect a further rise in yield inversion. They say, going forward, the yield inversion will not lead to an immediate economic slowdown in the country.
“Inversion of the yield curve is typical of an economy which is slowing down. While that is not the case here, a slowdown is imminent as seen by RBI scaling down growth to 6.4 percent for next year from 6.8 percent in fiscal year 2022,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
Alongside, an aggressive rate hike scenario signalled by the US Fed Chair Jeremy Powell will likely lead to further rate hikes in India by the RBI.
“If RBI infuses some liquidity, we may see some ease. But we expect two more rate hikes from the central bank,” said Venkatakrishnan Srinivasan, Managing Partner, Rockfort Fincap, a debt advisory firm.
At what levels are the one-year and 10-year bonds trading today?
At the time of writing this, the yield on the 364-day Bill is seen at 7.4072 percent while that of the 10-year benchmark bond is at 7.4517 percent.