Treasury bill auction cut-offs on Wednesday show yield curve inversion

The Treasury Bill auction cut-offs on Wednesday pointed towards yield curve inversion, with the yield of the 364-days T-Bill coming in lower than the 182-days T-Bill.

The cut-off yield of the 364-days T-Bill at 6.9554 per cent was lower than the 182-days T-Bill’s 6.9685 per cent, leading to inversion in yield curve. The cut-off of the 91-days T-Bill was 6.8391 per cent.

“The normal shape of the yield curve is upward sloping – that is short term yields (yields of short-term bonds) are lower than long term yields. However, at times the shape of the yield curve gets inverted – that is short term yields become higher than long term yields. This is known as yield curve inversion.

“Yield curve inversion takes place when the longer term yields fall much faster than short term yields. This happens when there is a surge in demand for long term Government bonds compared to short term bonds,” Mirae Asset Mutual Fund said in a note to investors. 

Madan Sabnavis, Chief Economist, Bank of Baroda, observed that the shorter term yields are being driven by the state of liquidity, which is getting tighter.

“Surplus liquidity has diminished to the region of ₹50,000 crore or so. The weighted average call money rate was 6.76 per cent yesterday thus indicating that even this surplus liquidity is not evenly spread across banks,” he said.

Sabnavis said the 10-year bond is being driven more by expectations of the RBI maintaining a status quo and probably also indicating some affirmative action on rates in future.

“We may expect this situation to prevail till the policy is announced,” he said.