Bond Yields Hit 3-month High Of 7.45%

Jayesh Faria, Associate Director, Regional Head - West, Motilal Oswal Private Wealth.

India's 10 year bond yield hit a high level of 7.45% which is the highest since November 22. This is an indication of nervousness in the market. In the last policy meeting, MPC refrained from giving forward guidance and retained the optionality to be on either side based on incoming data to change their stance to neutral on interest rates. The market is still worried about domestic inflation numbers and global issues like the Ukraine war etc., adding to discomfort with growth projections. The Yield curve in the last couple of weeks has been flat due to monetary policy tightening, normalization of liquidity by RBI, and global factors. There was hardly any liquidity premium left for locking in yield beyond 5 years of maturity. The term spreads between 5-10 years of maturity have been compressed to only 10bps as compared to 100 bps in 2020. So this increase in the yield will force interest rates to move to the new range of 7.50% to 7.75%.

Market experts feel that policy rates may have peaked and real rates would gradually increase with the easing of inflation. On account of global and domestic factors like Global Central Banks' policy actions, currency, inflation, crude oil, and geopolitical events, yields may remain volatile with an upward bias. This will be a good time for investors to lock in higher rates rather than take credit risk.

(Jayesh Faria, is the Associate Director, Regional Head - West, Motilal Oswal Private Wealth)