Spread between one year and ten years bond remains at decade high : Operation Twist ?

Past three months have seen the yields on short tenor papers (~ one year) crash by almost 125 bps while the yields for long tenor bonds haven’t seen a commensurate decrease. Yields on these longer tenor 10 year bonds have reduced by ~40 bps only. This has resulted in spreads between one year and ten years paper reaching levels last observed in 2010( as depicted in below chart).

The tenor spread has remained over 200 bps consistently for the past couple of months. This indicates that most of the liquidity that RBI has pumped in the system via purchase of foreign reserves, Open market operations and TLTRO has ended up chasing shorter tenor assets. This is also happening due to the huge borrowing which government is expected to do in coming quarters. Market seems to be wary of increase in yields as investors are not enthusiastic to take aggressive calls on longer tenor securities.

RBI has indicated its intent to flatten the curve in recent past by doing five simultaneous purchase of long tenor securities and sale of shorter tenor securities (also known as “Operation twist”). If you visualize a linear upward sloping yield curve, such monetary actions effectively “twist” the ends of the yield curve by pushing up yields at the shorter end and bringing down at the longer end, hence, the name Operation Twist. These operations did narrow down the difference to a certain extent. With the spreads again increasing its quite probable that RBI might again do few more such transactions.

Operation Twist Details

Date Sale Amount –
Shorter Tenor Securities
(in Cr)
Purchase Amount –
Longer Tenor Securities
(in Cr)
Apr 28, 202010,00010,000
Jan 24, 20202,95010,000
Jan 07, 202010,00010,000
Dec 31, 20198,50110,000
Dec 24, 20196,82510,000

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