The Reserve Bank of India (RBI) has warned the bond markets towards pushing yields larger at a time when the central financial institution is aiming for an orderly evolution of the yield curve. There is “no way” the financial system can stand up to larger rates of interest 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 within the bulletin stated.
Investors should perceive their exposures once they set about to scour the panorama and exploit indicators of market dysfunction. According to the central financial institution, what markets don’t realise past the break evens, TIPS and coverage stimulus is that there is no such thing as a means the financial system can stand up to larger rates of interest 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% throughout April, 2020 to January, 2021 surged to six.13% on February 2 on the announcement of the market borrowing programme of the central authorities, which turned out to be larger than what was anticipated. Following the announcement of measures by the RBI on February 5, the benchmark eased to five.96% by February 11.
The report attributed the hardening of yields thereafter to international spillovers within the type of hardening crude costs, bulletins of fiscal stimulus, inflation fright as revealed in break-evens and fears of central financial institution stance reversals, and a lukewarm response to the US Treasury’s major public sale. “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 progress forecasts for 2021 are raised, these “vigilantes” see in them the looming risk of lengthy dormant inflation. With these latent anxieties, they flip sceptical in regards to the central financial institution’s promise to stay accommodative and begin 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.