The “term premia” is an esoteric concept that generates much debate across bond markets. Particularly across Indian bonds.
Defined as the difference between short-term and long-term interest rates, the term premia can hide a number of messages. A wide-term premia may signal economic expansion, the risk of inflation or uncertainty. A more narrow-term premia may signal relative stagnation or even a recession.
In India, the term premia has remained wide for at least the last few years, leading to much head-scratching on who is to blame and what its implications are.
The additional interest sought by investors to hold longer-term bonds over shorter-term debt widened further after the Covid-19 crisis hit. As the central bank cut rates sharply and flooded the system with liquidity, short-term rates plunged but longer-term rates, reflected in the yield on the benchmark 10-year government…