Treasury bill yields plunge as SVB collapse affects interest rate view

After skyrocketing in the first 11 weeks of 2023, yields on the government’s Treasury Bills (T-bills) recorded a sharp decline on Wednesday as instability in global markets following the collapse of US-based Silicon Valley Bank (SVB) led to anticipation of central banks going slow on further tightening.

At Wednesday’s primary sale, the cutoff yields on 91-day, 182-day, and 364-day T-bills were set 11-17 basis points lower than the previous week’s auction.

With the collapse of the SVB triggering turbulence in the US and European banking sectors, the view among traders is that central banks such as the Federal Reserve would either slow down or hold off on fresh rate hikes. A slower pace of US rate hikes reduces pressure on the RBI to tighten monetary policy and maintain rate differentials, traders said.

Short-term instruments, such as T-bills, are extremely sensitive to interest rate expectations. “It is an extremely uncertain time for markets; the collapse of SVB has been followed by Signature Bank in the US. Credit Suisse is on a very shaky footing in Europe. All this suggests that central banks will have to go slow,” Naveen Singh, head of trading at ICICI Securities Primary Dealership, said.

“The T-bill cutoffs show that there is a market view here that the RBI may also decide to slow down on rate hikes and wait for the effect of previous hikes to play out on inflation,” he said.

The government sells T-bills on a weekly basis for short-term fund requirements. These short-term government securities are used as benchmarks for a variety of credit instruments in the economy as well as for some categories of bank loans. The auctions are conducted by the RBI, which is the government’s debt manager.

From December 28, 2022 to March 8, 2023, cutoff yields on the 91-day, 182-day and 364-day T-bills at auctions had surged by 66, 64 and 59 bps, respectively, effectively implying higher borrowing costs in the economy. Earlier this month, yield on the 364-day T-bill had risen above the 10-year government bond, inverting the sovereign yield curve.

The rise in the T-bill yields was owing to tighter liquidity conditions, apprehension of further rate hikes and extra supply of securities announced by the government in the Budget.

“The squeeze in liquidity has eased after the variable rate repo held by the RBI last week, which induced funds of about Rs 82,000 crore. Rates will remain volatile in the coming two weeks with about Rs 12,000 crore of LTRO (long-term repo operation) redemption also falling due next week,” Bank of Baroda’s chief economist Madan Sabnavis wrote.