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The bond market is wary of the 10-year benchmark bond going off the run. The 6.90% 2019 bond, which is the current 10-year benchmark, is seeing selling pressure as traders look to shift out of the bond before it goes off the run.

The market is shifting to the 6.35% 2020 bond as a traders stock it on fears about the present 10-year benchmark security. The 10-year bond closed last week up by 2 basis points (bps) while the 6.35% 2020 bond closed down 4 bps. Traders’ fears may be unfounded as the 6.90% 2019 bond has another Rs 20,000 crore of issuances to go, but in times of uncertainty on interest rates, no trader wants to get stuck with a bond that has almost Rs 40,000 crore of floating stock going off the run.

This week’s government borrowing will see Rs 4,000 crore of 6.90% 2019 bonds on auction and if traders’ nervousness on the bond continues, the cut-offs could come in much higher than current levels of 7.32%.

The overnight news on US unemployment figures, which came in at 10.2% — against expectations of 9.9% — will set the trend for this week’s trading.

The US dollar rose, commodity prices, except gold prices, fell and bond yields fell marginally on the back of the news. Bond yields will see a fall in initial trading, but its sustainability will be questioned as the market goes into the release of wholesale price index (WPI) numbers on November 12.

The government will release monthly WPI numbers starting November 12, but the numbers will not be based on the new WPI series which has 2004-05 as the base. The WPI will be based on the old series and is likely to see a big base effect factor, which could take the inflation to above 3% from last week’s level of 1.5%.

The market will also have to watch for the fact that the RBI has sounded a warning that inflation figures could move higher if the minimum support price (MSP) of agricultural crops is increased. The government had increased MSP for a few items last week.

The bond market is facing a lot of uncertainty and trading patterns are reflecting the nervousness. Trading is skewed towards on-the-run bonds, which account for almost 90% of total traded volumes. In effect, three bonds cannibalise all the volumes. The market is ignoring curve spreads and apparent yield pick-ups and only concentrating on trading three on-the-run bonds — the 7.02% 2016 bonds, the 6.90% 2019 bond and the 6.35% 2020 bond.

The uncertainty on the fate of the 6.90% 2019 bond will cause further disruptions in the market.

Liquidity, as measured by bids for reverse repo/ repo in the liquidity adjustment facility (LAF) auction of the RBI remained high, with bids for reverse repo at over Rs 1.2 lakh crore. Overnight rates were at 3% levels. Overnight rates are likely to remain at 3-3.25% levels given high system liquidity.

Government bonds

Government bonds saw 10-year yields move up week-on-week as the market created space to absorb fresh supply. The 10-year benchmark bond, the 6.90% 2019 note, saw yields move up 2bps to close the week at 7.32% levels. The new five-year benchmark, the 7.32% 2014 bond, saw yields move down by 3bps to close at 7.09% levels. The 6.35% 2020 bond saw yields close down 4bps at 7.71% levels while the long bond — the 8.24% 2027 security — saw yields close down 6bps at 8.18% levels.

The government auctioned Rs 9,000 crore of bonds this week. The bonds auctioned were the 7.32% 2014 bond for Rs 3,000 crore, the 6.35% 2020 bond for Rs 4,000 crore and the 7.50% 2034 bond for Rs 2,000 crore. The cut-offs came in at 7.09%, 7.77% and 8.34% respectively.

The government is scheduled to auction Rs 10,000 crore of bonds this week. The bonds to be auctioned are the 7.02% 2016 bond for Rs 3,000 crore, the 6.90% 2019 bond for Rs 4,000 crore and the 8.24% 2027 bond for Rs 3,000 crore.

Treasury bills, corporate bonds and overnight index swaps

Treasury bill (T-bill) yields were higher in the 91-day T-bill auction held last week, with the cut-off on the auction held on November 4 coming in at 3.27%, against a cut-off of 3.23% in the previous auction. The 364-day T-bill auction saw the cut-off coming in at 4.53%, against a cut-off of 4.54% seen in the previous auction.

The RBI is auctioning Rs 7,000 crore of 91-day T-bills and Rs 2,000 crore of 182-day T-bills this week.

Corporate bond yields were lower week-on-week on the back of liquidity-driven buying. Five-year benchmark bonds traded at 8.35% levels while 10-year benchmark bonds traded at 8.77% levels, down 15 bps and 5 bps respectively. Five-year spreads closed lower by 10 bps at 115 bps levels, while 10-year spreads closed lower by 7 bps at 132 bps levels.

Overnight index swaps (OIS) saw the curve move down week-on-week on the back of paid position unwinding. The five-year OIS yield closed lower by 18 bps at 6.62% levels, while the one year OIS yield closed lower by 15 bps at 4.62% levels. The one-over-five spread closed almost flat at 200 bps levels.

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