By Manish M. Suvarna
The spread involving 364-day treasury bills (T-bill) and 10-year benchmark government bond has broadened in the previous handful of weeks due to surplus liquidity in the banking program and a sharp rise in bond yields. At present, the spread involving the one-year T-bill and the 10-year bond is about 250 basis points, practically 60-70 basis points greater than usual.
“The spread between the T-bill and G-Sec has widened because T-bill rates have come down due to increase in liquidity surplus; while rising inflation and a potential rate hike is keeping 10-year yield elevated,” stated Pankaj Pathak, fund manager, fixed revenue, at Quantum Asset Management.
The reduce-off yield on T-bills has fallen sharply in the previous couple of weeks due to an enhance in systemic liquidity. Since July 7, the reduce-off yield on 364-day and 182-day T-bills eased 15 basis points each and every. Similarly, yields on 91-day T-bills moderated by 5-6 basis points. On August 11, the RBI set the reduce-off yields at 3.3892% on 91-day, 3.4695% on 182-day, and 3.6908% on 364-day T-bills.
The surplus liquidity in the banking program surged in July just after reduction in money in circulation and liquidity infusion via acquire of government securities below the G-Sec Acquisition Program (G-SAP).
Currently, the liquidity in the program is anticipated to be in surplus of about Rs 7.5 lakh crore and it is anticipated to rise additional this week due to inflows from G-SAP, government spending, and coupon flows or redemptions are anticipated to exceed outflows from excise duty, auctions and CIC leakage.
The spread has also widened since the yield on the 10-year benchmark bond continued to rise even just after the prices on T-bills fell. The rise in the yield on the 10-year bond was seen since of the devolvement on key dealers in the initially auction, increasing crude oil costs and greater inflation print in May and June.
Further, the bond yields have been below stress just after the central bank revised the customer value index forecast in the monetary policy. This move was a lot anticipated by the industry and participants adjusted their positions ahead of the policy. The yields had sharply risen on the policy day, but later moderated just after the RBI did not accept any bids on 10-year 6.10%-2031 benchmark bond.
Market participants anticipate reduce-off yields on T-bills unlikely to fall additional as liquidity surplus is anticipated to narrow in coming days, as the RBI will pull out liquidity from the program via variable price reverse repo (VRRR). It will conduct 4 VRRR auctions of Rs 13 lakh crore and the quantum will enhance by Rs 50,000 crore with each and every auction.
“Cut-off yield may not ease further on T-bill, but marginal moderation can be seen in one or two auctions because even though the RBI is withdrawing liquidity, but on the other hand, G-SAP auctions and coupon inflows will infuse little liquidity into the system,” a dealer with a compact finance bank stated.