The Reserve Bank of India (RBI) has warned the bond markets against pushing yields greater at a time when the central bank is aiming for an orderly evolution of the yield curve. There is “no way” the economy can withstand greater interest prices at this stage, the RBI stated in its bulletin for March.
“As countries rush to inoculate their populations, the global economy should regain lost momentum in Q2. Bond vigilantes could, however, undermine the recovery, unsettle financial markets and trigger capital outflows from emerging markets. The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav,” the ‘State of the Economy’ report in the bulletin stated.
Investors should fully grasp their exposures when they set about to scour the landscape and exploit indicators of market place dysfunction. According to the central bank, what markets do not realise beyond the break evens, Suggestions and policy stimulus is that there is no way the economy can withstand greater interest prices in its present state. “It is recovering but certainly not out of the woods yet,” the report stated.
The benchmark 10-year yield, which had averaged 5.93% in the course of April, 2020 to January, 2021 surged to 6.13% on February 2 on the announcement of the market place borrowing programme of the central government, which turned out to be greater than what was anticipated. Following the announcement of measures by the RBI on February 5, the benchmark eased to 5.96% by February 11.
The report attributed the hardening of yields thereafter to worldwide spillovers in the kind of hardening crude costs, announcements of fiscal stimulus, inflation fright as revealed in break-evens and fears of central bank stance reversals, and a lukewarm response to the US Treasury’s major auction. “It is a familiar script. The pandemic stirs a heady cocktail – fiscal stimulus; monetary accommodation; release of pent-up demand; vaccine rollout – on which the bond vigilantes thrive,” the report stated. As development forecasts for 2021 are raised, these “vigilantes” see in them the looming possibility of lengthy dormant inflation. With these latent anxieties, they turn sceptical about the central bank’s guarantee to stay accommodative and start out the rout.
“Nevertheless, forewarned is forearmed: bond vigilantes are riding again, ostensibly trying to enforce law and order on lawless governments and central banks but this time around, they could undermine the economic recovery and unsettle buoyant financial markets,” the RBI stated.