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ShareThe market is likely to seek direction from auction cutoffs and liquidity trends this week. The Reserve Bank of India has announced a government bond auction for Rs 7,000 crore to be held on November 23 under the government borrowing programme.
The auction is as per the schedule given in the auction calendar for second half of fiscal 2007-08. The market will seek direction from the auction cutoffs, given that the next auction is scheduled for the next month.
A bullish cutoff could see a rally building up and gathering momentum, though the market may go into the auction on a bullish note given benign global interest rate environment.
The system liquidity was strained last week as the CRR (cash reserve ratio) hike of 50 bps took effect. Liquidity was also tight on account of festive season currency demand and busy season credit offtake. The market sought funds from RBI under the repo window at 7.75%. The market, however, expects liquidity to ease as currency in circulation decreases.
US treasury yields slid to 4.15% as markets took in a weakening US economy and credit turmoil. US ten year yields have slid around 75 bps this calendar, while the two year notes have fallen by over 100 bps. The US Federal Reserve (Fed) has cut benchmark rates by 75 bps since September this year and markets are betting on further cuts. The next major Central Bank to cut rates is expected to be the Bank of England on the back of falling housing prices.
Bond markets closed better last week with 10-year yields down 4 bps at 7.88% levels. Tight liquidity flattened the curve with the one over five swap curve flattening by 3 bps to close the week at a spread of 2 bps. The markets will prefer to trade the longer ends given that liquidity may remain tight until money comes back into the system.
Liquidity as measured by bids for reverse repo/ repo in the LAF (liquidity adjustment facility) of the RBI was negative with bids forrepo at 7.75% at around Rs 30,000 crore.
Overnight rates were close to repo levels of 7.75%. Rate may remain at around repo levels given the high bids for repo.
Government bonds
Government bond yields closed mixed week on week. The yield on the benchmark 10-year bond 7.99% 2017 bond closed lower by 4 bps to close at 7.88% levels. Five-year benchmark bond yields closed higher by 3 bps with the yield on the 7.40% 2012 bond closing at 7.83% levels. Yields on the long bond the 8.33% 2036 bond closed lower by 3 bps at 8.35% levels.
The RBI is scheduled to auction Rs 7,000 crore of government bonds this week. The bonds to be auctioned are the 7.99% 2017 bonds for Rs 3,000 crore and the 8.35% 2022 bonds for Rs 4,000 crore. The market may go into the auction on a bullish note given global cues and limited future supply.
T-bills, corporate bonds and overnight index swaps
Treasury bills (T-bills) yields were higher week on week on strained liquidity conditions. The cutoff on the 91-day T-bill auction held on November 14 came inat 7.52% against a cut off of 7.31% seen in the previous auction. The 182-day T-bill auction saw the cutoff coming in at 7.60% against 7.58% seen in the previous auction..
The RBI is auctioning Rs 2,000 crore of 91-day and Rs 2,000 crore of 364-day T-bills this week, including Rs 1,500 crore of 91-day and Rs 1,000 crore of 364-day T-bills under MSS (market stabilisation scheme)
Corporate bonds saw five-year benchmark bonds yields move higherby over 10 bps week on week on the back of strained liquidity conditions. The five-year AAA bonds were quoting at 9.35%-9.40% levels. The five-year AAA spreads closed at around 142 bps levels higher by 7 bps week on week.
Credit spreads are likely to take direction from liquidity and supply. Overnight index swaps (OIS) saw the swap curve flatten on strained liquidity. One-year OIS yield fell3 bps to close last week at 7.24% levels while the five year OIS yield closed lower by 6 bps at 7.26% levels. The one over five spread closed down 3 bps at 2 bps levels. The curve will remain flat given tight liquidity conditions.
The author is head, Portfolio Management Services, Sundaram BNP Paribas AMC Ltd. The views expressed by the author are his own and need not represent the views of the organisation in which he works.
