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Forecasting Bond Yields in the Era of Omicron By: Jaideep Katiyar (Shri Ram College of Commerce) Financial markets (“markets”) were only recovering from the 1 and 2 waves of the Covid-19 pandemic that the 3 wave put by the delta variant is upon us. Undoubtedly, this was anticipated and shadow measures were already set in force by the controllers. At the surface level, the economy looks to be faring pretty well owing to the success of different IPOs, but it is only the tip of the iceberg. Dig deep and one can see the harm caused by the outbreak that it looks nearly impossible for the Republic’s markets to reach pre-pandemic levels. One thing is clear from the lessons learned so far, that it is going to be a bumpy ride in 2022. st
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Only about 3% of the total eligible population actively participate in the markets. Approximately half of these market players trade in fixed-income securities to minimize or diversify the risk. Bonds generate a fixed stream of cashflows, thereby helping investors during uncertain times. History is full of events where bond yields predicted cycles of recession. It is then imperative that we devote our time to the debt-market returns. Yield is the percentage rate of return on the amount invested. Bond yields depend primarily on the market rate of return (“interest rates”) and the time to maturity. However, bond values are determined by coupon rate and redemption repayment in addition to the factors mentioned previously. Keeping our focus on bond yields, academia dictates that interest rates affect bond yields directly. Higher the interest rates, higher will be the bond yields, and vice-versa. Data showcases that India’s bond market has started recovering from the pandemic. At the onset of the pandemic, yields on the 10-Year (“Benchmark”) and 5-Year bonds were 6.1% and 5.6% respectively. The yields gradually declined with time reaching to an all-time low of 5.8% and 4.8% for the 10Y and 5Y bonds respectively, during the first wave and started gaining traction in the coming quarter. This period between July and September of 2020 is herein referred to as the “Impact period”. Since July’20, the yield curve is sloping upward indicating that traders were anticipating positive returns. The GDP growth rate is also moving in tandem with the yield curve for both 10Y and 5Y bonds. This proves our previous point that yield curves and GDP cyclicity go hand-in-hand.
