Gilts Crash To Record Lows

It seems to be a bottomless pit for money market instruments. Government security prices surged 45-50 paise at the long end today, pulling down the yield on 10-year paper to yet another new low at 9.08 per cent. Bankers say it can pierce the nine per cent level next week if the government decides to stay away from the market. The 10-year paper yield was pegged at 10.25 per cent on March 31, 2001.

In tandem with dated papers, treasury bill yields are also moving southwards. Yields on the 91-day treasury bills dipped to 6.85 per cent today. On March 31, it was as high as 8.5 per cent. During this period, the 364-day treasury bill yield has come down from 8.85 per cent to 7.07 per cent. Bankers expect this to come down further and dip below the bank rate as well as the refinance rate of seven per cent.

With short-term treasury bill yields already falling below the refinance rate, banks cannot arbitrage between the refinance rate and treasury bill rates.

While the banking industry is saddled with a massive liquidity overhang, the dipping interest rates directly benefit the government