7-10 flattener trade

5 เม.ย. 2022

In the budget speech for FY 2023, market borrowing of 14.95 lakh crore from the market. In the Feb MPC meeting, the RBI brought down its estimates of growth and inflation potentially signaling that economy is/will go through a demand slowdown.

Now in a slowing economy, the govt. finances will be affected. Therefore, to bring back the economy on the fiscal consolidation so that sovereign bond ratings are not hit, the Indian govt. must figure out a way
1. Lower its interest payments in the face of increasing public expenditure on creating public infrastructure (read roads/highways etc. ). One simple way is to go down the yield curve in lower maturities to bring down the interest costs.

Keeping in mind (1) above, it was not difficult to expect a borrowing schedule where the shorter tenors will form a bigger percentage of the net issuance by the government.
In fact, if you look at the issuance calendar for securities below the tenor of 10 yrs (which is 2,5,7 yrs), you will find that itself comprises of ~31% of total borrowings.

Therefore, due to increased pressure on the shorter tenors and relatively less pressure on 10 yr bond yield, we can expect the yields spreads to compress in 7-10 yr region of the yield curve.

This script is written to track the same yield spread compression across 7 & 10 yr tenor.