Treasury bill auction cut-offs on Wednesday show yield curve inversion

Wednesday’s Treasury auction cutoffs signaled an inversion of the yield curve, with the yield on the 364-day Treasury bill falling below the 182-day Treasury bill.

The 364-day Treasury’s final yield of 6.9554 percent was lower than the T-Bill’s 182-day final yield of 6.9685 percent, resulting in an inversion of the yield curve. The 91-day T-Bill cutoff was 6.8391 percent.

“The normal shape of the yield curve is upward sloping – that is, short-term returns (the returns of short-term bonds) are lower than the long-term returns. However, sometimes the shape of the yield curve is inverted – that is, the short-term returns become higher than the long-term returns. This is known as In the name of the inversion of the yield curve.

An inversion of the yield curve occurs when long-term returns fall much faster than short-term returns. This occurs when there is more demand for long-term government bonds than for short-term bonds, the Mirae Asset Mutual Fund said in a note to investors.

Madan Sabnavis, chief economist at Bank of Baroda, notes that returns in the short term are being driven by the increasingly tight liquidity situation.

“The excess liquidity has dwindled to the region of ₹50,000 crores or so. The weighted average interest rate on demand funds was 6.76 per cent yesterday which indicates that even this excess liquidity is not evenly distributed across the banks.

Sabnavis said the 10-year bond is driven more by expectations that the RBI will maintain the status quo and may also signal some positive rate action in the future.

“We might expect this situation to prevail until the policy is announced,” he said.