‘Yield tandav’: RBI forewarns against ‘Bond Vigilantes’

Mumbai, March 19 (SocialNews.XYZ) The Reserve Bank of India on Friday warned against 'Bond Vigilantes' as they could undermine recovery, unsettle financial markets and trigger capital outflows from emerging markets.

In its monthly bulletin for March, RBI said that the Reserve Bank is striving to ensure an orderly evolution of the yield curve, "but it takes two to tango and forestall a tandav".

"Five developments marked the onset of March. First, calm returned after the flash bond sell-offs globally and in India, that heralded the arrival of March, prompting a calling out of vigilantes who have returned to prowl markets, guns holstered and saddled up," the bulletin read.

In India, the bulletin cited that benchmark 10-year yield, which had averaged 5.93 per cent during April 2020 to January 2021 surged to 6.13 per cent on February 2 on the announcement of the market borrowing programme of the Central government, reportedly higher than "what was expected".

Following the RBI's announcement on February 5, the benchmark eased to 5.96 per cent by February 11.

"Thereafter, global spillovers in the form of hardening crude prices, announcements of fiscal stimulus, inflation fright as revealed in break-evens and fears of central bank stance reversals, and a lukewarm response to the US Treasury's primary auction sparked a worldwide stampede in bond markets."

The bulletin further said that with the US 10-year benchmark soaring to 1.6 per cent from around 1 per cent, bond markets in India were pit-roasted by persistent selling and shorting; by March 5, the benchmark in India had touched 6.23 per cent, but RBI's announcements of large-sized "operation twists" soothed frayed nerves and settled the benchmark at around 6.21 per cent on March 9.

"Yields, however, firmed up subsequently on spillovers from the spike in US yields. Although the turmoil was short-lived, it gave a glimpse of the destabilising impact of expectations running too far ahead of outcomes as if with the onset of spring, summer cannot be far behind - as if the recovery has gained full traction and inflation is round the corner."

In a tell-tale sort of manner, the bulletin said the pandemic has stirred "a heady cocktail - fiscal stimulus; monetary accommodation; release of pent-up demand; vaccine rollout - on which the bond vigilantes thrive."

"As growth forecasts for 2021 are ratcheted up, they see in them the spectre of long dormant inflation, the archenemy of bonds as it erodes the real value of the fixed income they provide. With these latent anxieties, bond vigilantes turn sceptical about the central bank's promise to remain accommodative and start the rout."

Furthermore, the RBI bulletin warned that bond vigilantes are "riding again, ostensibly trying to enforce law and order on lawless governments and central banks" but this time around, they could undermine the economic recovery and unsettle buoyant financial markets.

Source: IANS