Bond yield curve inverts: Should investors be worried?

An inverted yield curve is unusual, and it reflects bond investors’ expectations of a decline in longer-term interest rates. An inverted yield curve is typically viewed as an indicator of recession.

However, this phenomenon is more in developed countries and not in developing countries like India, said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

“The inversion happened here due to higher-than-expected cut-offs on treasury bills sales, which in turn, was triggered by a deficit in the liquidity in the banking system,” he said.

This declining trend in liquidity and inversion of the yield curve is likely to continue for some more time, according to Vijayakumar, but he does not expect it to impact India’s GDP growth in the next fiscal year.

On the global front, the US Federal Reserve head Jerome Powell’s hawkish remarks on interest rate hikes have dampened sentiment.

At a time when investors are anticipating a slowdown in the pace and quantum of rate hikes, Powell said that interest rates may need to be raised faster than previously expected to plug inflation.The 364-day T-Bill yield in India has jumped 58 basis points in the last six weeks amid uncertainty over interest rate hikes, while banking system liquidity moved into deficit which is expected to widen in the coming weeks, according to a Reuters report.

India’s banking system liquidity deficit widened to over Rs 700 billion in February, with the daily average liquidity also slipping into deficit on a monthly basis for the first time since May 2019.

In February, RBI Governor Shaktikanta Das said that the central bank will remain flexible and responsive in meeting the liquidity requirements in the wake of the higher expenditure by the government and the large market borrowing plans.

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