Domestic bond markets have rallied sharply on account of rate softening by RBI as well as a rate cut by the US Fed. India’s sovereign bond yield recently dipped to a 10-year low.
In bond markets, Bond prices and yields move in opposite directions. India’s benchmark government bond yield has dropped to its lowest since the subprime crisis of 2008,as per ET reports.
What is the bond market telling you? Is there trouble for investors ahead? Should you take your flight to safety? This graphical analysis will give you a clearer picture.
The US Fed cut rates taking into account muted inflation and global developments that threaten to hurt growth prospects.
It has left doors open for more rate cuts in the future. This has boosted sentiment and fuelled bond market rallies worldwide.
Domestic bond markets have rallied sharply on account of rate softening by RBI as well as a rate cut by the US Fed.
Trimming of fiscal deficit target by the government and planned shift in part of government’s borrowing to overseas bond markets has also led to jubilation in the bond market.
The gap in yield between highest grade corporate bonds over comparable government securities has increased.
As credit events singed bonds of even the highest grade companies, investors flocked to the safety of government debt.
This also means that borrowing costs of corporates have not come down in proportion to drop in interest rates.
Bond Markets tumbling in many countries
Investor concerns about slowing global growth and easing of monetary policy in the world’s largest central banks have sent bond yields tumbling in many countries.
A negative interest rate means you have to pay to keep your money in the bank. As a result, investors in such bonds are not receiving interest but must pay more than the face value of the bonds to acquire them.
Therefore, this is a deliberate policy designed to spur economic growth by forcing people to spend and invest rather than keep money idle. Additionally, it also incentivizes banks to lend more aggressively.
In the US, since 1967, every major recession has been preceeded by inverting of the yield curve.
Typically, investors demand higher yields from longer-term bonds to compensate for the higher risk of keeping their money tied up for a longer period.
By: Abhinav Ranjan, Editorial Desk, DKODING Media