A rumor.....

I have an account with Citibank, that I have in the past used to buy mutual funds park some cash etc. From time to time their "Relationship Manager" will come calling and try and sell me some more mutual funds.

On his latest visit he mentioned an interesting tid-bit. The banks are all buying the long-end of the T-Bill (India Gilt) and not the short-end. I thought that was interesting because its contrary to what the banks are "expected" to be doing.

One of the easiest ways for Banks to earn money is to play the spread i.e. acquire funds at the short-end and lend out funds at the long-end. Thus their goal is to have a steep yield curve - with an upward slope, anything else and they make less profits than they normally would.

By buying the long-end they are increasing the price of the bond (higher demand) and depressing the yield, this flattens the yield curve and reduces the profits banks would make by playing the spread.

So why are they doing it? Are they expecting Deflation in the future and hence lower interest rates, and in so doing locking in the current "relatively" high yields.