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Fixed Income

Inverted CD Yield Curve – An Update


Quick post about CD yields today. CDs are Certificates of Deposit, trade in the fixed income markets at sizes of a crore or more, and are issued by banks. Think of them as big fixed deposits. This data is for 29 March 2011.

CD Yields 29 March 2011

(Legend – size of the circles is the total amount traded, X axis is days to maturity , and Y Axis is the yield in % to maturity, annualized)

CD trades are short term (<365 days) and are quoted as discount to maturity (there is no coupon interest rate). So you buy at 99.5 and get back Rs. 100 in N days.

Importantly, the last few days have been been seeing heavy and high yield trades at the low end of the game – look at the top left, there are a number of trades above 11.5% in the <20 day range.

People are willing to pay more (and therefore get less yield) from a 1 year CD, where yields are around 10%, than for a 15 day deposit where it’s 11%+. In general that would mean an inverted yield curve (basically lack of near term money, but people expect that in the long term, rates will come down). That situation has been a negative for equities the world over, and while it hasn’t yet shown up in bonds (where the yield curve is between the 1 years and the 20 year bonds) the CD market is showing signs of stress. It could be a March 31 effect, since strange things happen near the end of a financial year.Or it could be more deep and systemic – we’ll see in the first week of April. In my view it should ease up in April, but my view is not important.


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