Treasury Bill yields soar over tighter liquidity, inflation worries

Yield curve flattens; T-bill, 10-year bond spread now at 16 bps versus 222 bps a year ago

Reflecting tighter liquidity conditions in the banking system and growing unease about persistently elevated inflation, yields on treasury bills issued by the government have skyrocketed over the past couple of weeks.

The government sells T-bills of three maturities – 91-day, 182-day and 364-day – on a weekly basis to take care of its short-term borrowing requirements. Given the short-term nature of these instruments, they are highly sensitive to liquidity conditions and near-term interest rate expectations.

Since February 1, cutoff yields on 91-day, 182-day and 364-day T-bills at weekly auctions have jumped 26 basis points, 25 bps and 28 bps, respectively,