Signs of an inverted yield curve emerging

With continuous buying interest on the three year and five year maturities, its yields dipped below the shorter tenure one year and two year maturities, reflecting an inverted yield curve in the market.

A phenomenon as such is very seldom and the sustainability of it is questionable. The one year and four month bond was seen changing hands at levels of 12.75% and the 364 day bill was seen changing hands at levels of 12.66%, while the three year and five maturities were seen changing hands at levels of 12.60% and 12.65% respectively by the end of the week.

This was despite the Central Bank’s borrowing costs increasing on its 182 day and 364 day bills for a fourth consecutive week at its weekly Treasury bill auction, while the weighted average (WAY) on the 91 day bill remained steady.

A reduced budget deficit for the year 2013, Central Bank’s projections for inflation to ease to mid-single digit levels by the second quarter of next year along with growth expected to increase to 7.5% and the outcome of its fourth term reverse repo auction was seen as the reasons towards the strange behaviour of the yield curve.

However interestingly, volumes changing hands were rather moderate throughout the week as most participants were awaiting the monetary policy outcome due by the end of this week.  

Meanwhile in money markets, overnight call money and repo rates closed the week steady at 10.54% and 9.66% respectively as market liquidity ended the week on a net deficit of Rs 1.08 Bn. The OMO department of the Central Bank rolled over a maturing Rs. 8 b term repo by reissuing Rs. 9 b at a WAY of 9.87% for a further period of 31 days.

Rupee dips during the week

Seasonal importer demand saw the rupee lose ground throughout the week, close to the Rs. 131 level in comparison to its previous weeks closing level of Rs. 130.32. However subsequent to the budget the green back gained a bit of its lost ground to close the week at Rs. 130.80.

Given are some forward dollar rates that prevailed in the market on Friday: one month – 131.83; three months – 134.25; and six months – 137.50.

(Source: Wealth Trust Securities)