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ShareBond yields, which had risen up almost 100 bps from levels seen in May on the back of a series of negative factors, are now seeing the emergence of 'green shoots' that can potentially reverse the trend of rising yields.
The 'green shoots' appear in the form of expectations of a manageable fiscal deficit for 2009-10, fall in global bond yields from highs, stabilising oil and commodity prices and central banks' commitment to keep interest rates low.
The Union Budget for 2009-10 is to be tabled in Parliament on July 6. The bond market, which was circumspect on the extent of overshooting of the fiscal deficit indicated in the vote on account tabled in February 2009, is now looking at a manageable fiscal deficit. The fiscal deficit of the central government is expected to be around 6% of GDP as against 5.5% of GDP stated in the vote on account.
The increase in fiscal deficit of 0.5% of GDP would translate into higher government borrowing of around Rs 50,000 to Rs 60,000 crore. The market is comfortable with this higher number given that an additional Rs 18,000 crore has been borrowed in the first quarter of 2009-10, leaving Rs 30,000 crore to Rs 40,000 crore of additional borrowing in the next couple of quarters.
The bond market has shown that the additional government borrowing is absorbable with a record Rs 60,000 crore of supply in June 2009 being absorbed without large disruptions in yields.
Global bond yields, which had moved up by around 50-100 basis points (bps) over the last couple of months, have fallen from highs seen a couple of weeks back. US treasuries, German bunds, UK gilts and Japanese government bonds have rallied as the market felt that the rise in bond yields has been overdone, given that economies are far from any kind of sustainable recovery and inflation is still a non-event.
Oil prices, which had touched six month highs, have come off from peaks on the back of lower demand and higher inventories. Central banks across the globe have reaffirmed their intent to keep policy rates ate all time lows until they see sustainable signs of economic recovery. The Reserve Bank of India (RBI) has indicated that they will wait till the third quarter of this fiscal to judge the impact of its policy actions. The RBI will keep policy rates at all-time lows and maintain high system liquidity in conjunction with their pro-growth policy stance.
Inflation as measured by the wholesale price index (WPI) came in above market expectations of negative 1.68% at negative 1.14% for the week ended June 13, 2009. Inflation is expected to remain in the negative zone for the next few weeks on the back of high base effect.
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 crossing Rs 130,000 crore. Overnight rates were at 3% levels. Liquidity will continue to be high in the system keeping overnight rates low.
Government bonds
Government bonds saw the most traded bond, the five-year benchmark bond, the 6.07% 2014 bond yield closed down 15 bps at 6.5% levels week-on-week. The bond received a good response for the Rs 6,000 crore auction held last week with the cut-off coming in at 6.51% levels. The cut-offs on the long bond auctions were higher than market expectations in terms of yields with the cut off on the 8.24% 2027 bond and the 7.40% 2035 bond coming in 10 bps higher than expectations. The yield curve steepened by around 20 bps on the back of auction cut-offs.
The government auctioned Rs 15,000 crore of bonds last week. The bonds auctioned were the 6.07% 2014 bond for Rs 6000 crore, the 7.94% 2021 bond for Rs 4000 crore, the 8.24% 2027 bond for Rs 3000 crore and the 7.40% 2035 bond for Rs 2000 crore. The cut-offs came in at 6.51%, 7.34%, 7.81% and 7.90%, respectively.
Treasury bills, corporate bonds and overnight index swaps (OIS)
Treasury bill (T-bill) yields were lower in the 91-day T-bill auction held last week with the cut-off on the 91-day T-bill auction held on June 24 coming inat 3.32% against acut-off of 3.36% seenin the previous auction. The 182-day T-bill auction saw the cut-off coming in at 3.53% against a cut off of 3.59% seen in the previous auction. The RBI is auctioning Rs 2,000 crore of 91-day T-bills and Rs 1,000 crore of 364-day T-bills this week.
Corporate bond yields were flat week-on-week on the back of stable government bond yields.
Five-year benchmark bonds traded at 8.05% levels while ten-year benchmark bonds traded at 8.65% levels. Five-year spreads closed down up 16 bps at 144 bps levels. Corporate bond yields are likely to remain steady at lower levels of yields this week. OIS saw the curve shift down week-on-week.
The five-year OIS yield closed down 25 bps at 6.12% levels while the one year OIS yield closed down 18 bps at 4.15% levels The one over five spread came off by 7 bps to close the week at 197 bps levels. The OIS curve is likely to trend down on the back of improved bond market sentiments.
