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Below Monthly Debt View for November 2022 by Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund

The bond market was range bound in October 2022. The 10-year maturity government bond was (G-sec) trading between a broad range of 7.35% and 7.55%. On a monthly closing basis, the 10-year G-sec settled 5 basis points higher at 7.45% on October 31, 2022, versus 7.40% on September 30, 2022. In 2022 so far, the 10-year yield has moved up 100 basis points.

Money market rates continued to move higher with 3 months' treasury bill moving up by 35 basis points during the month from 6.09% on September 30, 2022, to 6.44% on October 31, 2022.In 2022 so far, the 3-monthtreasury bill yield is up 280 basis points.

Liquidityconditions continued to tighten due to increased cash withdrawals and forex sale by the RBI. Liquidity surplus in the banking system as measured by banks’ net lending or borrowing under the RBI’s liquidity adjustment facility (Repo, SDF, MSF, etc.), declined from an average of ~Rs. 760 billion during September to an average of ~Rs. 35 billion in October 2022. It was around Rs. 7 trillion at the start of the year.

The global market’s volatility increased further during October as bond yields across developed markets moved up sharply by the middle of the month and retraced back partially by the month end. The 10-year US treasury yield shoot up from 3.83% to 4.24% and then fell back to close the month at 4.04%. Similarly, the 10-year German bund yield jumped from 2.1% to 2.41% and then fell back to 2.14% by the October end.

In the United Kingdom, the bond market (Gilt) continued to witness extreme volatility since the controversial tax cut proposal by the UK government in September. Longterm gilt yields had shot more than 130 basis points ina matter of 7 days. It triggered a panic selling by pension funds due to large losses on their leveraged positions and forced the Bank of England to announce bond buying to cool off the market.

Later, in October, the government withdrew the tax cut proposal and instead announce a further tightening of fiscal policy. Following all the policy flip-flops, the 10-year gilt yield first jumped from 3.2% on September 19, 2022, to 4.5% by mid-October and then fell back down to 3.5% by end of the month.

Turbulence in the gilt market was though started by a bad fiscal policy, the market reaction was compounded dueto a lack of market liquidity and investors’ nervousness given the fast pace of rate hikes around the developed world.

Investors have been complaining ofa similar lack of liquidity in the US treasury markets. In Japan also trading dried up completely in the 10-year benchmark bond for four consecutive sessions.

With these incidents, financial stability concerns have resurfaced. There is a worry that the fast pace of rate hikes in the developed world would further deteriorate the liquidity in the financial market.

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