US benchmark rises by over 40 bps since the day of election
The spread between the US 10-year treasury yield and the Indian 10-year benchmark yield reached a 5-year low of 417 basis points on Wednesday after the US benchmark rose by over 40 basis points since the day after the presidential elections were concluded.
The US 10-year treasury yield, which closed at 1.85% on November 8 (election day), rose by nearly 40 bps in the following week to close at 2.26% on Tuesday — the highest closing level since January 1 — mere months after the treasury yield touched a lifetime low of 1.36% in July.
This fall in prices was mainly because of the market’s expectation that President-elect Donald Trump would increase government spending to fuel growth and boost inflation, said dealers. Most market participants believe that the country’s debt will rise as a result of the extra spending, and will push the Federal Reserve to increase interest rates quicker.
The sell-off seemed to have halted on Tuesday when reports surfaced of investors questioning how much increased spending will the new president be able to implement. However, this reversal in prices was short-lived and 0547 ET (Eastern Time) on Wednesday, the benchmark treasury yield was trading at 2.27%, which is a high for this calendar year so far.
Over the same period, the Indian benchmark yield has fallen by around 35 bps to 6.44% after the government’s decision to scrap the R500 and R1,000 denomination currency notes. At this level, the benchmark yield closed at its lowest in more than seven years.
The scrapping of the high denomination notes resulted in an increase in people’s bank deposits, thereby pushing banks to invest more in government securities, dealers said. Other government securities — those with shorter tenures — also saw a similar decline in yields, with the 5-year gilt and the 3-year gilt closing at 6.37% and 6.28%, respectively, 27 bps and 30 bps lower than their close on November 8, the day Prime Minister Narendra Modi addressed the nation.
The 2-year and 1-year gilts also saw a similar pattern in yields, having closed at 6.26% and 6.36% respectively on Wednesday, 29 bps and 17 bps lower than their November 8 closing levels.
In fact, the 10-year, 5-year, 3-year and 2-year gilts closed on Wednesday at their lowest levels since May 2009, July 2009, February 2010 and July 2010 levels.