What does the G-Sec Yield Curve data represent?

The graphical relationship between yield and maturity among government securities (G-Secs) of different maturities.

This curve shows the term structure of interest rates. The slope of the yield curve reflects the difference between yields on short-term bonds (e.g., 1 year) and long-term bonds (e.g., 10 years).

To graph the yield curve, the yield is calculated for all government bonds at each term to maturity remaining. For example, the yield on all government bonds with one year remaining until maturity is calculated.

What is the significance of the G-Sec Yield Curve data?

G-Sec Yield Curve is an important indicator in the bond market, reflecting investor expectations about future interest rates, inflation, and economic conditions.

This data enables investors to compare debt securities with different maturities and coupons.

The shape of the yield curve is important for the financial sector, particularly banks, as it affects their net interest margin (the difference between interest income generated and interest paid).

The yield curve provides insights into the effectiveness of monetary policy and central bank actions, especially in terms of managing the curve and liquidity in the economy.

How to interpret the G-Sec Yield Curve data?

A steepening curve (wider spread) typically indicates expectations of stronger economic growth and potentially rising interest rates, while a flattening curve or inverted curve can signal caution about slower growth or economic uncertainty.

Analyse spread trends that influence the central bank's monetary policy, particularly regarding interest rate decisions and market interventions. A widening spread might suggest higher anticipated inflation, impacting long-term interest rates.

Normal yield curve: A ‘normal’ shape for the yield curve is where short-term yields are lower than long-term yields, so the yield curve slopes upward. This is considered a normal shape for the yield curve because bonds that have a longer term are more exposed to the uncertainty that interest rates or inflation could rise at some point in the future. This means investors usually demand a higher yield to own longer-term bonds. A normal yield curve is often observed in times of economic expansion, when economic growth and inflation are increasing. In an expansion, there is a greater likelihood that future interest rates will be higher than current interest rates, because investors will expect the central bank to increase its policy repo rate in response to higher inflation.

Inverted yield curve: An ‘inverted’ shape for the yield curve is where short-term yields are higher than long-term yields, so the yield curve slopes downward. An inverted yield curve might be observed when investors think it is more likely that the future policy interest rate will be lower than the current policy interest rate. In some countries, such as the United States, an inverted yield curve has historically been associated with an economic contraction. This is because central banks reduce policy rates in response to lower economic growth and inflation, which investors may correctly anticipate will happen.

Flat yield curve: A ‘flat’ shape for the yield curve occurs when short-term yields are similar to long-term yields. A flat curve is often observed when the yield curve is transitioning between a normal and inverted shape, or vice versa. A flat yield curve has also been observed at low levels of interest rates or as a result of some types of unconventional monetary policy.