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Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

It’s not just Indian bond yields that have fallen

Bond yields around the world plunged after Brexit, which is a bit of a surprise since the event was supposed to trigger a flight to safe-haven assets such as US treasuries and gold

Indian government bond yields have fallen to a three-year low, but they are not alone. As the table shows, bond yields around the world have plunged after Brexit.

That’s a bit of a surprise since the event was supposed to trigger a flight to safe-haven assets such as US treasuries and gold. Indeed, that has been partly true as US government bonds and German Bunds are among those who have seen yields fall the most. Bloomberg says around $10 trillion of securities among the sovereign bonds it tracks yield less than zero, up from about $9 trillion a week ago.

But Brexit has also raised hopes of central bank stimulus from Japan, China and the European Central Bank. The consensus on the US Federal Reserve’s rate hike action is also tending towards “one and done", another reason for the easy liquidity situation to continue.

Such liquidity conditions and falling yields in developed country sovereign yields—people are now talking about a 1% yield on 10-year US gilts—have forced investors to chase yields in emerging markets. The premium demanded by these investors to hold riskier emerging market assets has also fallen, according to Reuters.

Consequently, government bond yields have plunged by as much as 48 basis points in Indonesia and the Philippines, and this bond rally has also been matched by all other asset classes, except perhaps, oil.

If anything, the Indian 10-year bond’s 10 basis point fall is among the lowest, which is also partly attributable to the limits imposed on foreign investor presence in this asset class.

This 10 basis point fall is despite the 80,000 crore liquidity infusion by the central bank’s open market bond buying. On the other hand, this has led to a steeper fall in short-term rates. The three-month treasury bill in India is down 29 basis points. Does the more sober reaction of Indian long-term yields have to do with more entrenched inflationary expectations?

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