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Fixed Income

Bond Markets Crash, All Yields Above 9%

Bond markets are in a tizzy. The 10 year bond is now close to 9.25%. And that doesn’t even tell you the story – all other bonds, I mean every single one of them – is above 9%, and short term yields are beyond 11%. Look at the yield curve:

Yield Curve

(Source: CCIL)

And look at just the 10 year bond above, over the month of August:

10 yr bond movement in Aug

This is going absolutely nuts.

The 10 yr was issued at Rs. 100 in May. This is a 13% loss in the 10 year security in three months. I don’t remember the last time the bond market was this bad (maybe 1998).

Impact: Mutual funds that hold long term bonds will lose serious money (more than 2% just today).  Ultra short term and liquid funds may not be impacted much. Banks will lose big time as they hold nearly 44% of all government securities. LIC and other Insurers (18%) are next.

Money is getting more expensive. Expect deposit rates to increase. Then, expect lending rates to increase. 

  • Karl says:

    Will these high rates lead to the long awaited “correction” / “crash” in property prices or will the sector be immune? The chickens are coming home to roost. The government could have taken the tough decision in 2008 but instead they bailed out the sector by directing most PSU banks to increase lending at a time when many developers (politically connected) were on the brink of insolvency leading to even higher prices. We are living in interesting times to say the least.

  • Maulik says:

    Banks loosing money here and making money in CMB and MSF arbitrage…. Lets see whether they loose more or make more…..

  • Saurabh says:

    Considering the massive increase in bond yields and limited chances of reversal of recent steps taken by RBI, do you think people who have been holding gilt funds should exit at this price?
    To add to the previous question, want your views on the yield curve. As inversion of yield curve typically leads to higher interest rates in the long term, as the yield curve becomes normal, do you think its better to avoid the gilt funds altogether, for the time being.
    Where should one park money for the risk averse investor, who believed in the safety of the gilt funds? FMP or short term, if yields stabilize at these levels?
    What is view on the Rupee and the yield on Gsec (10 yr).
    Awaiting your reply.

  • Leo says:

    Guys again telling u this is nothing imagine 15% on 10 year .
    the rates were dropped last year was a big the forced push will be strong.U really think Fiis will take the hit with bonds and INR collapsing.
    If was an FII holding debt i would freek out righ tnow