Indian 10 year bond yields

Indian 10 year bond yields


  • 09 Apr 2020

Bond yields are rising for several days in a row and it is possible that wave 5 down ended in an ending diagonal as shown below. Then the 5 wave decline is over and we are now in an upward trajectory for bond yields in India. The chart is of the 10 year GSEC yields. This 5 waves down has a few options in terms of wave count. It is either a part of a large triangle or wave 1 down as part of a larger trend. In both scenarios bond yields will rise for months. In the former scenario yields rise much more than in the wave 2 case. I am keeping both options open as we explore the economic winter. Markets are ignoring this data point for now as the RBI has just spent over 2 lakh crore in OMOs. But the higher yields show that that this might have just met temporary demand and if they are to hold rates a lot more will be needed.

gsec 090420

But this is exactly what I expect in a winter. When debts are unwinding on the back of rising risk, risk get repriced upward. Credit growth is anyway at a halt. Now lenders will demand a premium for risk that the RBI wants to change. Lower rates will only go to new borrowers with a new business model that is not based on leverage but cash flow. Now the chart below shows what I have been anticipating for long. One more push to the top end of the triangle pattern if not a throw over as well. This means yields go back to 9.50 percent again. One alternate reason why this can happen is the government eventually takes over private debt, whether by bailouts or some other program. This would mean that the government becomes the biggest borrower in the market. That will drive up yields unless RBI monetises alll the new borrowing at the cost of the currency. These are all moving parts and we will have to see what actually occurs. What I can say from the two charts on this page is that yields head higher. Initiall toward 7-7.6%, but not ruling out a larger move toward 9.5% at the peak of the crisis.

gsec 090420a



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