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The government is auctioning Rs 15,000 crore of bonds this week, capping a record Rs 60,000 crore of bond sales for June 2009. There are no auctions scheduled for the last week of June and July is scheduled to have lower bond supply than what was seen in each of the last three months.
The budget for fiscal 2009-10 is scheduled to be unveiled on July 6. The bond market is expecting the government to overshoot its borrowing target for 2009-10 that was set in the vote on account in February. The market is hopeful that the excess borrowing will be restricted to Rs 50,000 crore of which Rs 15,000 crore has already been raised in the May-July period. The market is also hopeful that any additional fiscal stimulus will be met out of proceeds of disinvestment and 3G auctions. There have also been reports of administered savings rate being brought down in the budget. If the budget meets market expectations, the market can expect a healthy rally in bond yields.
Bond yields closed flat week on week despite emerging positive factors. The advance tax received for the first quarter of 2009-10 is estimated at around Rs 26,000 crore, which was similar to last year’s figure. These numbers are positive for the market, which is expecting lower tax collections for the fiscal 2009-10.
Oil prices which have been threatening to move higher have come off from the highs of $72 per barrel to below $70 per barrel. Bond markets were worried higher oil prices would lead to higher inflation expectations.
Global bond yields have come off from highs seen in the past couple of weeks and are seen stabilising at current levels. The coming off of bond yields, coupled with fall in oil prices, is an indication of trend reversals where rising bond yields have been accompanied by a rise in commodity prices. This reversal of trend, if it continues, will have a positive impact on bond markets.
Inflation as measured by the wholesale price index (WPI) came in below market expectations of negative 1.26% at negative 1.61% for the week ended June 6, 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 Reserve Bank 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 yields close flat week on week. The benchmark ten-year bond, the 6.05% 2019, saw yields close flat at 6.90% levels. The yield on the five-year benchmark bond, the 6.07% 2014, closed flat at 6.66% levels while the long bond, the 6.83% 2039, saw yields close flat at 7.80% levels.
The government auctioned Rs 15,000 crore of bonds last week. It auctioned the 6.49% 2015 bond for Rs 5,000 crore, the 6.35% 2020 bond for Rs 5,000 crore, a new 15-year bond for Rs 3,000 crore and the 7.50% 2034 bond for Rs 2,000 crore. The cut offs came in at 6.67%, 6.87%, 7.35% and 7.80%, respectively. The government is auctioning Rs 15,000 crore of bonds this week. It will auction the 6.07% 2014 bond for Rs 6,000 crore, the 7.94% 2021 bond for Rs 4,000 crore, the 8.24% 2027 bond for Rs 3,000 crore and the 7.40% 2035 bond for Rs 2,000 crore.
The RBI purchased Rs 4,620 crore of bonds through open market operations last week. The bonds purchased were the 7.38% 2015 at 6.67% yield, the 8.35% 2022 at 7.45% and the 8.33% 2036 bond at 7.85%.
Treasury bills, corporate bonds and overnight index swaps (OIS)
Treasury bills (T-bills) yields were flat at the 91-day T-bill auction on June 17, with the cut off coming in at 3.36%. The 364-day T-bill auction saw the cut-off coming in at 3.99% against 4% at the previous auction. The RBI is auctioning Rs 5,000 crore of 91-day T-bills and Rs 500 crore of 182-day T-bills this week.
Corporate bond yields were lower week on week on the back of stable government bond yields. Five-year benchmark bonds traded at 8.05% levels, down 20 bps week on week while ten-year benchmark bonds traded at 8.65% levels, down 15 bps week on week. Ten-year spreads closed down 13 bps at 165 bps levels while five-year spreads closed down 20 bps at 124 bps levels. Corporate bond yields are likely to remain steady at lower levels this week.
Overnight index swaps (OIS) saw the curve shift down week on week. The five-year OIS yield closed down 8 bps at 6.37% levels while the one-year OIS yield closed down 9 bps at 4.33% levels The one-over-five spread was almost flat at 204 bps levels. The OIS curve is likely to trend down on the back of stable government bond yields.
Disclaimer: The writer is head - fixed income, IDFC Mutual Fund. Views are personal