1. The US 10 Year Treasury yields have crossed 3% and seems headed up. Equity markets seem toppy to me ain't going to be a free ride from here on. Volatility is going to increase as the easy money is slowly withdrawn as growth picks up globally. The labor market too is pretty strong for the past couple of years and I think the US is going to start seeing wage pressure and over a period of time will start showing up in inflation. Probably the Fed will have to normalise faster. The 10 Year Treasury historically is closer to 5% to 6% than 3%. So still quite a ways to go.
2. Looking at the US yield curve, on the long side (ie 10 to 30 year) it is actually nearly flat, but from the 1 year to 5 year going on to 10 , 15 and 30 year, it is actually upward sloping, despite all the Fed "twist" and all that market operations.
3. Coming to India , Check out our Yields
and check out the yield curve. The 5 year benchmark ( 7.16 GS 2023 ) has a HIGHER yield than the 10 year (7.17 GS 2028) and the other traded G Secs with 2026 and 2027 having higher yields than the 10 year as well.
4. What it means is that India has an INVERTED yield curve . The bond markets are sending out a clear message with pricing in the shorter term bonds higher than the longer term (with higher duration risk) bonds, which is basically means poor longe term prospects and indeed a recession around the corner.
5. India's macros have steadily deteriorated. The INR has to drop , oil prices will increase, inflation expectations look to become unanchored again (anchoring inflation expectations is something that Raghuram Rajan tried very hard to do and kept real interest rates positive in his term). The RBI is really caught out here. They face the twin deficit problem again. Sorry folks, interest rates NEED to go up here . No two ways about it.
6. The Govt borrowing HAS to be cut and the overall fiscal pressure on savings has to be brought down. But with election year in 2019, that aint gonna happen and what should be "pass thru" in terms of pricing like oil might NOT happen. I fully expect this govt to get on to the bad old Congress habit of off balance sheet borrowing (like the infamous oil bonds) and stuff . The already did that with the PSU bail out /re cap bonds. More of the same. In any civilised place all those are contingent liabilities which have to recognised on your books, okay we will let that pass.
7. The govt has basically NOT done structural reforms (okay dont quote GST and the bankruptcy and reorg) on the industrial side , especially of the PSU /Govt side, while expanding spending. This govt though that "cleaning the clogged drains" and getting decision making going again will get the economy going. But no, despite the oil windfall in the earlier part, that simply was not enough. The Indian economy has too many structural issues on the Govt/PSU industrial side that has locked up capital, drains the surplus generated by the productive parts of the economy and indeed has put a tax on the entire economy by higher rates of interest for everyone, because the govt's higher borrowing needs.
8. It aint looking pretty. Hang on folks, and the Govt better start praying that the Fed doesn't start hiking interest rates faster, oil stays where it is (anything above this will start inflicting serious pain) . While the govt will repeat the Congress in 2014 strategy of spend like crazy and bust the bank, and hand a poisoned chalice to the successor in case you dont come back, I hope they start doing that later towards the election, rather than front load it. Somehow I think they will front load the spending binge. Lets see.