What explains this spike in bond yield or is it just a reaction to what is happening on the US 10-year paper?
So I would say it is a confluence of multiple events. There was already quite a bit of pressure in the Indian bond yields because of continued supply and tepid demand. To top it, we had the US auction yesterday and the bid-cover ratio was at 11-12 years’ low. That obviously aggravated the bond market woes in the US and that had its ripple effect in India. Cause and effect is very difficult to identify but the trigger had started way ahead of today.
What happens next? Would there be some central bank intervention or are we going to continue aligning ourselves with domestic factors and what is happening in US money markets?
So it is going to be both the things together. We require catalysts. 40% of the US auction of $62 billion were actually taken by primary dealers there. We are seeing similar trends in India. We would require the central bank to support at different intervals. It is not fair to expect the central banker to come in at every reaction because some of them are even globally led selloffs. So if the Reserve Bank of India maintains its stance which they are stating quite often that they will support to ensure that there is orderly evolution of yield, we should see some kind of guided intervention as and when required.
What is your view in terms of the shorter term yields and do you believe that they will largely be guided by the kind of guidance that we see from the central banks?
No, the short end of the yield curve is a different story. It is buoyed by healthy liquidity in the banking system and there also, today’s yield curve is reflecting that there is going to be a rate hike between now and next six months. So excessive paranoia is surrounding the bond markets. I do not know when we will see stability but these yields have to cool off, stay like that for a while and there will be lots of demand factors which will shape up these yields in the coming weeks.
The next couple of weeks are going to be very critical. It is very surprising to see comfortable liquidity in the banking system. Yet the short end of the yield curve is also ramping up. One part of it can be explained because the Reserve Bank of India via Operation Twist is supplying short bonds and that could be one reason. But that is just one part of it and does not explain the entire move.
Which do you think would be the riskier markets that would stand to be impacted when the US Treasury goes higher?
The recent spate of bond yields rising is not restricted to just the US or India. In fact, the US yields have risen much more than India. Yields in countries like Austria and France which were trending in the negative zone have turned positive after a long time. We have seen yields in Australia inch up by 15 to 20 bps. So wherever there is this fear of stimulus led reflation trade cropping up, there is that paranoia and the resulting sell off.
It remains to be seen how central bankers are going to do the balancing act. No doubt, they need stimulus. The US wants to do a $1.9 trillion stimulus and that ideally should be very pro equities. However, the bond market selloff has not really left equities any place to hide.
It is a vicious cycle and the cycle needs to be broken like the Covid chain had to be broken. But it cannot be broken at one go and the status quo restored. So it is going to be a volatile period ahead, investors should brace for volatility across asset classes and not try to derive explanation for every move. Certain things are seemingly inexplicable.
