Yield Spread Widening between SDLs and G-Secs

  • January 3, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Yield Spread Widening between SDLs and G-Secs

Subject: Economy

Section: Monetary Policy

  1. Yield Spread Widens to Two-Year High:
    • The spread between yields on 10-year state bonds and the benchmark 10-year government bond has widened.
    • On Tuesday, the yield spread reached 53 basis points (bps), marking a two-year high.
    • The last time it widened above 50 bps was in January 2022.
  2. Growing Disparity in Borrowing Costs:
    • The widening yield spread indicates an increasing difference in borrowing costs between states and the central government.
    • States may face higher costs when raising funds compared to the sovereign.
  3. States’ Borrowing Plans:
    • States and union territories are set to borrow Rs 4.1 trillion during January-March.
    • Karnataka, West Bengal, Madhya Pradesh, and Tamil Nadu account for half of this borrowing.
    • Karnataka and West Bengal are expected to contribute significantly to the incremental borrowing of Rs 1.1 trillion in the last quarter.
  4. Year-on-Year Increase in State Borrowing:
    • This borrowing surge represents a 37.4% year-on-year increase, following the substantial issuance of Rs 3 trillion in Q4 FY23.
  5. Potential Yield Spread Outlook:
    • Analysts suggest that the yield spread might widen further, possibly reaching 60 bps during the quarter if states borrow the indicative amount.
    • The average spread stood between 30 and 35 bps in the first and second quarters, reflecting historical trends.

Yield Spread and its aspects:

Yield Spread refers to the difference between the yields of two different financial instruments or securities. It is often used to analyze the relative risk or return between these instruments.

The yield spread is calculated by subtracting the yield of one security from the yield of another. It provides insights into the additional compensation investors require for taking on higher risk or choosing one investment over another.

A widening yield spread may indicate increased risk perception or economic uncertainty wherein narrowing spread may suggest improving economic conditions or reduced risk.

Investors and analysts use yield spreads for investment decisions, risk assessment, and gauging market sentiment.

Historical spread trends provide context for evaluating current market conditions.

economy Yield Spread Widening between SDLs and G-Secs