Informist, Friday, May 26, 2023
By Aaryan Khanna
NEW DELHI – Treasury bills in India maturing in the first half of June traded near the policy repo rate this week and were in line with overnight market rates, unlike US papers maturing next month on which yields have spiked over fears of a debt default as early as Jun 1.
Yields on US debt instruments maturing in the first week of June spiked to over 7% earlier this week, but have since retreated as US President Joe Biden and House of Representatives Speaker Kevin McCarthy appeared closing in on a deal that would raise the debt ceiling, which sets the borrowing limit for the US government.
In India, 91-day and 182-day T-bills maturing on Jun 1 ended at 6.55% in the secondary market today, slightly above the policy repo rate of 6.50%. Two sets of T-bills maturing on Jun 8 were traded, settling at 6.50-6.55%. The 91-day T-bill maturing on Jun 15 ended even lower at 6.45%.
The risk of either a shutdown in the US government or a debt default will plunge the world's largest economy into a recession, and wreak havoc for global financial markets, analysts have said. Back home, investors refuse to price in default risk into T-bills on the view that the reaction in US short-term yields is a sovereign issue, and a default will have broader economic consequences that will impact other financial instruments, dealers said.
"Investors are shifting their preference to avoid US government's default window on Jun 1, which is not the case with the Indian government," said Pankaj Pathak, fund manager – fixed income at Quantum Mutual Fund. "The impact will be felt more on the macroeconomic factors, and will reflect on long-term yields rather than short-term borrowings."
The world's largest economy is top-rated by ratings agencies Moody's and Fitch Ratings, and holds the second-highest rating from S&P Global Ratings.
The US is no stranger to such deadlocks on the debt ceiling, with S&P docking a notch in its creditworthiness in 2011 over a similar impasse. Fitch has placed the US on negative ratings watch this week, signalling that an immediate rating cut is impending if a deal to raise the government's borrowing limit is not reached by Jun 1.
Short-term debt instruments like T-bills in India have also been in favour with traders this week on bets of liquidity conditions remaining easy until September, dealers said. On May 19, the Reserve Bank of India injected 467.90 bln rupees through a 14-day variable rate repo operation.
The government spending the RBI's larger-than-expected surplus transfer will also boost liquidity. Banks and other financial institutions, the major investors in T-bills, typically deploy their excess cash in liquid short-term securities.
Economists expect liquidity in the Indian banking system to also jump due to the withdrawal of 2,000-rupee banknotes from circulation, another measure announced by the RBI last week, which will lead to a surge in bank deposits until Sep 30.
On Wednesday, the 91-day T-bill cut-off yield at the auction fell to its lowest level since mid-April. The 182-day and 364-day T-bill cut-off yields also slumped to lows from January and December, respectively.
Pathak expects Indian T-bill yields to fall more next week, in line with evolving domestic liquidity conditions rather than the unlikely situation of the US defaulting on its payments. The sentiment was echoed by traders, who see the US debt ceiling deadlock as political posturing that will ultimately conclude in a deal without a financial blowout.
"The proposition that the US could default on US Treasury debt is insane," a dealer at a foreign bank said. "That is a move that will put them right from 'AAA' to a D-rated borrower."
The US will reach an agreement on its debt ceiling, considering the gravity of the situation, V. Anantha Nageswaran, chief economic adviser to the Indian government, had said on Thursday.
Bond traders will have a front view seat to take its next bets on T-bills, with the next auction coming up Wednesday. The RBI will next auction 120 bln rupees of 91-day T-bills, 120 bln rupees of 182-day T-bills and 80 bln rupees on Wednesday, the eve of the potential default. End
Edited by Tanima Banerjee
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