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Fixed Income

Government Bonds Fall 1% to 4% on the Liquidity Squeeze


Mutual Funds are going to have it rough in the next few days. Bond prices have crashed after the liquidity squeeze introduced by RBI late evening on the 15th. Government bond prices have fallen between 1% and 4% in a single day. Here’s how the prices have fallen, plotting the difference in price (as a percentage fall) over the previous day, on a per-maturity date basis.

Fall in Govt Bond Prices: Capital Mind

Source: CCIL

(There are some items are zero loss; these are bonds which have not traded today, and probably traded in the last six days. You can ignore them – there was no trade at the “zero loss” number. There is one bond that seems to have “increased” in value, the 2041 bond, which is probably an outlier)

Yields at the 10 year level rose to an astounding 8.2% (the 2022 bond) from about 7.66% yesterday. Yields are inversely related to prices – a lower price is a higher yield (usually).

To know more about Bond Yields, see this video I created a while back: What are Bond Yields?

The situation is just as bad with corporate bonds where yields have gone beyond 10%. The Commercial Paper (CP) and Certificate of Deposit (CD) market – where corporates and banks issue short term debt  – have also seen yields go beyond 10% even for maturity terms as low as 45 days.

Given this, mutual fund portfolios will see a pretty big hit on the debt side. If you thought debt was safe, it’s not – not even ultra short term or liquid funds. Anyone that has invested in such assets, even short term assets, will see a huge price drop today.


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