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The market is waiting for April to commence serious trading. For it will bring a fresh supply of bonds as the government commences its borrowing program for fiscal the next fiscal.

The supply in the face of rising inflation expectations and expected policy rate hikes by Reserve Bank of India (RBI) will give direction to yields.

Until the first of the auctions in April, the market will be lackluster given the complete lack of trading interest.

Index of Industrial Production (IIP) for January grew 16.7% year on year, marginally below market expectations of 17%.

The numbers were robust enough for yields to rise with the ten-year yield rising from 7.97% to 8.01% levels post data.
The market is expecting inflation to come near 10% for February.

Inflation as measured by the wholesale price index is expected cross double-digit levels for March on the back of a sustained rise in food, fuel and manufactured products’ prices.

Global bond yields have been stuck in range for a while with every country facing its own issues.

The US ten-year treasury yield is at 3.70% levels and has been trading in a 3.6% to 3.9% range for a while.

German ten-year bund yield is at 3.15% levels and has been trading in a 3.1% to 3.3% for some time now.

Countries such as Greece and the UK with fiscal issues have seen more volatile trading. China is seeing higher trending consumer price inflation leading to expectations of monetary tightening by the central bank.

One common factor across all central banks is the reluctance to venture into monetary tightening to quell inflation expectations.
Central banks would rather remain behind the curve on inflation in order to kickstart/ sustain economic growth. The markets will have to look away from central banks to determine direction of bond yields.

Liquidity, as measured by bids for reverse repo/ repo in the liquidity adjustment facility (LAF) auction of the RBI was comfortable with bids for reverse repo at 3.25% averaging around Rs 65,000 crores for the week.

Overnight rates were at reverse repo levels of 3.25%. Liquidity is likely to tighten as advance tax outflows (expected to be in the Rs 45,000 crores to Rs 50,000 crores range) hit the system towards end of this week. Overnight rates may move towards repo rates of 4.75% if liquidity goes negative

Government bonds
Spreads between the outgoing ten-year, on-the-run bond and the temporary trading substitute widened. The 6.35% 2020 saw yields close the week at 8.01% levels, up 4 basis points (bps) week on week, while the 7.02% 2016 saw yields rise 1bps at 7.68% levels. The spread between the 6.35% 2020 and the 7.02% 2016 widened by 3bps to 33bps levels.

The five-year 7.32% 2014 saw yields droop 4bps at 7.30% levels and the 8.24% 2027 yield ended down 2bps at 8.38% levels. The market will see lackluster trading till the end of the month.
Treasury bills, corporate bonds and OIS

Yields on the 91-day treasury bill auction on March 10 came in higher at 4.34% against a cut-off of 4.22% at the previous auction. The 364-day auction also saw the cut-off coming in higher at 5.12% against a cut-off of 5.01% seen in the previous auction. RBI is auctioning Rs 5,000 crores of 91-day bills and Rs 3,000 crores of 182-day paper this week.

Corporate bonds saw yields wind down week on week as the market bought into higher yields. Five- and ten-year corporate yields closed last week at 8.60% and 8.90% levels, respectively, down 5bps week on week. Three-year yields came off by 15bps, while one-year came off 20bps to 8.20% and 6.30%, respectively.

Ten-year AAA credit spreads closed almost flat at 79 bps levels. Corporate bonds are likely to face resistance at lower yields given concerns on liquidity and direction of interest rates.

Overnight index swaps (OIS) saw the curve steepen week on week. The five-year OIS yield closed higher by 3bps at 7.07% levels, while the one-year yield fell 3bps at 4.98% levels. The one-over-five spread closed up 6bps at 209bps levels. The curve is likely remain steep given concerns on inflation and on government bond supplies.

Disclaimer: The writer is head, fixed income, IDFC Mutual Fund. Views are personal.