• Accelerated inflation and taxes could weigh on real fixed income yields
• Decline in yields and narrowing returns in gilts could shift funds back into other investments

The sharper fall in bill yields in last couple of weeks, and specially the plunge seen at this week’s primary auction has sparked concerns.

Worry persists on the possibility of the bills no longer being an asset class which could offer investors the real positive yield which they once enjoyed in the comfort of holding a relatively safer asset class.
Taxes could slash the returns from fixed income and inflation has also accelerated above Central Bank’s upper band of 6.0 percent in January. This could continue for a period until the one time effects from higher taxes and weather related supply disruptions recede.

The concerns over the possible negative real yields - the returns calculated adjusting for inflation and taxes - were sparked when the yields at this week’s bill auction cratered at a level much sharper than many had anticipated. 
The yields across the 3, 6 and 12 months maturities came down by 101 basis points (bps), 113 bps and 127 bps to 10.96 percent, 11.07 percent and 10.73 percent.

With this week’s auction, the Central Bank has effectively brought the bill yields at a striking distance from their key policy rates, something it continuously maintained.

The Central Bank has managed to bring the bill yields down by a year-to-date 355 bps, 309bps and 220bps respectively across the three maturities without moving the needle on key policy rates.

As returns earned via investing in bills and bonds narrow, and potentially fall below the level of inflation adjusted for tax and inflation, the investors in fixed incomes would likely seek investments elsewhere, while the banks are expected to pump in more money into the real economy via new loans.