Bond mart to feel liquidity pinch

The week that went by continued to experience an undercurrent of anxiety over bilateral trade tensions and the potential impact on the global economy. The US government’s partial shutdown could cost the economy $8 billion so far and could shave off some significant basis-points of GDP growth.

China’s growth pace continues to slow while Germany cut 2019 GDP growth forecasts. European Central Bank warned of downside risk. Indian markets traded in a narrow range with a bias for weakness in bonds and currency. Worries over fiscal deficit as electoral profligacy could have a direct bearing on the expenditure continues to affect market sentiment.

The US dollar continued to trade with a stronger bias more as a fallout of weakness in major economies and their currencies. News that the US Federal Reserve may end bond portfolio run-off earlier than anticipated spooked rates’ markets. While the financial markets benignly ignored the government partial shutdown, the dominating theme for the last week was the now-too-familiar US-China trade talks, which now looks like an eternally improbable resolution and China’s sharp slowdown.

China’s targeted Margin Lending Facility and Muni issuance plans clearly indicate the rearguard action by the People’s Bank of China to prop up the faltering economy. This could have a strong bearing on the region’s central bank policies, with economies like India and Indonesia likely to claw back their hawkish policy undertones.

In other developments, the European Central Bank held rates steady, However, it stated that the balance of risks for growth is now tilted to the downside, while a recession is still a low-probability outcome in the near term. Germany in the meanwhile reported a sub-50 PMI, which is indicative of a sharp downturn. It lowered growth estimates to 1% from an earlier 1.8%. Global bond yields, however, remained firm and crude prices held steady and at recent highs. Volatility remained flat and unchanged. Venezuela may hold the key in the next leg of oil-price volatility. 

Indian bond markets have turned negative since the issuance of the new benchmark paper. The new security closed the week at a discount to issue price, with a yield of 7.30%. The sentiment remains weak and demand low. Credit growth is seen picking up thus denting the appetite for bonds, even as banks grapple with a potentially tighter liquidity conditions ahead. Ten-year bond yield should range in the 7.45%-7.60% (older benchmark) for the week and next set of cues may emanate from the Budget.

WEAK SENTIMENT

• Indian bond markets have turned negative since the issuance of the new benchmark paper
   
• The new security closed the week at a discount to issue price, with a yield of 7.30%

The writer is a market expert