The government securities yield curve has stiffened since the beginning of the new financial year. The spread between overnight rates and ten-year paper has gone up to 216 basis points (a hundred basis point is one percentage point) compared with the usual 80-90 basis points. | |
| While the steepening is visible across maturities, the short-term has seen the sharpest rise as the spread between seven-day repo rates and 5-year government paper is at 180 basis points against the earlier 40-50 basis points. |
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| Dealers said that the short term has been priced with a 50 basis point hike in the repo rate, the rate at which the market players park their excess funds with the central bank. "The curve in the near end had also factored in the rising spreads signalled in the cut-off yield in the last two auctions of the Reserve bank of India "" floating rate bond 2015 and 91-day treasury bills," said a dealer. |
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| Similarly, the spread between the one-year and 15-year papers, which was 77 basis points on April 1 has more than doubled to 153 basis points today, followed by a trebling of the spread between one-year and five-year paper, which was 44 basis points on April 1, has almost trebled to 122 basis points. |
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| Till a few months back, the yield curve was flat indicating liquidity overhang in the system. The liquidity has not dried out but the upward slopes signals that the expectations of low interest continuing may not last long. Bankers are not unnerved by the rising yield as it has been combined with a growth in banks' loan books. |
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| Up to July 23, the banking sector witnessed Rs 35,894 crore raise in non-food credit against Rs 3,640 crore in the corresponding period last year. On an year on year basis, the non-food credit growth is Rs 1,57,341 crore against Rs 91,261 crore last year. |
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| In line with the expectations of the rate hike in the bond market, the overnight swap rates (OIS) are going up but not in the same pace as the bonds. This is because the expectation have been already priced in the swaps. |
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| Therefore, the spread between underlying government securities and the corresponding swap maturity has been narrowing. Currently the spread between 5- year OIS and government security has narrowed down to 21 basis point. |
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