US Treasury yields could settle around 4.75 pc: SBI report

New Delhi, Nov 1 (IANS) US Treasury yields could settle at broadly around 4.75 per cent level for some time, but a short term blow up to 5.25-5.35 per cent is not ruled out amid the mid-term elections, a report showed on Sunday.

US Treasury yields have moderated from their recent highs and are currently hovering around 4.9 per cent, the underlying dynamics suggest such yields could remain elevated for some time now from its historical levels, said the SBI Ecowrap report.

There is a growing mismatch between the supply of government securities and the absorption capacity of investors.

“Our demand-supply assessment suggests a $304 billion excess supply of US treasury consistent with US fiscal deficit at 6.15 per cent of GDP,” the report mentioned.

Interestingly, the corresponding mismatch was significantly lower, at around $140 billion in 2015, when the US fiscal deficit stood at just 2.5 per cent of GDP. This widening gap highlights the growing pressure on the bond market to absorb additional government borrowing.

The maturity-wise assessment further indicates that the excess supply is concentrated in longer-duration securities, with papers above 10 years accounting for approximately $108 billion of the mismatch, followed by the 1–5-year segment at around $96 billion, clearly reflecting the demand for hyperscalers.

“Our scenario-based analysis further suggests in our most likely scenario, the 10-year US Treasury yield could reach around 4.75 per cent. We believe that this is the mostt likely scenario because of the following reason. The US mid-term elections could deliver a verdict in favour of Democrats. The Democrats as per historical trends follow a policy of fiscal prudence,” the report noted.

Given this, if the US government undertakes meaningful measures post November 9 to contain its borrowing requirements, US yields could potentially move towards 4.75 per cent and even the Hormuz could finally reopen.

Alternatively, fiscal consolidation through expenditure rationalisation and lower borrowing requirements could help moderate the pressure on yields but will impact US growth and of course Dollar Index will weaken subsequently, said the SBI report.

In the unlikely scenario of no corrective steps being taken, US may head towards a deeper crisis with higher fiscal deficit and accumulated debt, it added.

A similar assessment for India indicates an excess supply of approximately Rs 1.52 lakh crore. However, unlike the US, the Indian government has already undertaken measures to manage its borrowing programme through bond switches and buybacks, which has brought down the gross borrowing requirement by Rs 1.23 lakh crores and could be cut further.

The 10-year G-sec yield spread between India and US is currently hovering 250 bps with the India’s yield at roughly 7.43 per cent and the US yield at 4.93 per cent.

—IANS

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