Yield curve inversion persists in corporate bond market
- June 13, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Yield curve inversion persists in corporate bond market
Subject :Economy
Section: Fiscal Polity
- Yield curve inversion occurs when the yield on short-term debt instruments is higher than that of longer-term bonds. It is a rare but significant occurrence in finance and has historically preceded recessions, making it a reliable indicator
- In developed markets, an inversion in the yield curve implies an oncoming recession. In India, supply-demand dynamics generally determine the trajectory of the yield curve. So, the inversion in the yield curve is not a leading economic indicator.
- The corporate bond market in India has been experiencing a yield curve inversion due to a supply-demand mismatch, with issuers preferring to raise resources via 3-5 year bonds while investors prefer high-yielding long-term bonds with maturities of 10 years and above.
- This mismatch has led to the shorter end of the market being higher yielding than longer-dated securities, pushing the yield curve to invert
- Normalization of the curve is expected to occur within the next couple of quarters, once the Reserve Bank of India hints at any rate cuts.
- Future yields will be determined by various factors, the over all impact of which will determine the direction:
- Factors supporting a decline in bond yields (or increase in Bond price): Declining inflation, peaked policy rates, and a comfortable external position are all strong backdrops supporting the bond market over the medium term.
- Factors supporting an increase in bond yields (or increase in Bond price): Uncertainty over the timing, quantity, and distribution of rainfall amid forecasts of El Nino conditions.
Bond Yield and the Yield curve Bond Yield Bond yield refers to the return on investment in a bond. It is the figure that shows the return an investor gets on a bond and is calculated by dividing the coupon amount by the price. The relationship between bond prices and yields is inverse, with rising prices resulting in lower yields and vice versa. Yield Curve The yield curve is a graphical representation of yields on similar bonds across various maturities, and an idealized yield curve slopes upward to reflect the higher risk associated with holding longer-term debt |