Comment

RBI measures pull up yields

The Reserve Bank of India (RBI) followed the Cash Reserve Ratio (CRR) hike of 50 bps in the mid-term review of the annual monetary policy by a hike in the Market Stabilisation Scheme (MSS) ceiling by Rs 50,000 crore.

The RBI raised the MSS limit from Rs 2,00,000 crore to Rs 2,50,000 crore last week. Bonds yields rose after the hike was announced, and closed the week higher by around 6 bps with the ten-year benchmark bond closing at 7.92% levels from 7.86% levels seen in the week before last.

The RBI is actively managing liquidity to sterilise the excess liquidity in the system brought about by their intervention in the currency markets.

The US dollarweakness is seeing the dollar/rupee pair under pressure to depreciate, after the dollar tanked against the majors last week. The weak assessment of the US economy by the US Federal Reserve chairman took the dollar to all-time lows against the euro while US treasuries rallied sharply on expectations of a Fed rate cut.

US ten-year bonds fell 10 bps last week to close at 4.22% levels.

The MSS outstanding is at over Rs 1,85,000 crore, leading to the hike in the ceiling. RBI’s buying of dollar/rupee has led to broad money supply growth at over 22% levels, above RBI target levels of 17%.

RBI has had to resort to CRR hikes and MSS bonds to sterilise the excess liquidity. The liquidity measures by the RBI have led to the yield curve flattening.

The one-over-five OIS (Overnight Index Swaps) spread is at around 5 bps, down from almost 20 bps two weeks back. The swap spread indicates weakness at the shorter end of the curve.

Bonds are likely to trade in a narrow range this week, with any rally happening at the ten-year and above maturities.

Liquidity as measured by bids for reverse repo/repo in the LAF (Liquidity Adjustment Facility) of the RBI was down week-on-week. Bids for reverse repo at 6% last week were at Rs 2,000 crore levels against over Rs 7,000 crore seen in the week before last.

Overnight rates hovered around reverse repo rates of 6% and could trend higher if liquidity goes into negative with the kicking in of the CRR hike on November 10.
Government bonds

Government bond yields closed higher week on week.The yield on the benchmark ten-year bond 7.99% 2017 bond closed higher by 6 bps to close at 7.92% levels.

Five-year benchmark bond yields closedhigher by 4 bps with the yield on the 7.40% 2012 bond closing at 7.80% levels.

Yields on the long bond, the 8.33% 2036 bond, closed higher by 6 bps at 8.38% levels.

The RBI held government bond auctions under the government borrowing programme last week. The bonds auctioned were the 8.20% 2022 bond for Rs 5,000 crore and the 8.33% 2036 bond for Rs 3,000 crore.

The cut off came in at yields higher than market expectations. The 8.20% 2022 bond auction saw the cut off coming in at 8.26% levels, which was 5 bps higher than market expectations.

The 8.33% 2036 bond auction saw the cut-off coming in at 8.39% levels, 7 bps higher than market expectations. A mild rally is in these bonds is in the offing given the higher cut offs.

T-Bills, Corporate Bonds and Overnight Index Swaps

Treasury bills (T-bills) yields were higher week on week on liquidity fears.The cut-off on the 91-day T-bill auction held on the November 7 came in at 7.31% against similar cut-off seen in the week earlier to last.

The RBI rejected the MSS component of the auction to avoid higher cut-off yields. The 364-day T-bill auction saw the cut-off coming in at 7.76% against 7.36% seen in the previous auction.

The RBI is auctioning Rs 3,500 crore of 91-day and Rs 2,500 crore of 182-day T-bills this week including Rs 3,000 crore of 91-day and Rs 2,000 crore of 182-day T-bills under MSS.

Corporate bonds saw five-year benchmark bonds yields move higher by over 10 bps week-on-week on the back of liquidity fears. The five-year AAA bonds were quoting at 9.25-9.30% levels.

The five-year AAA spreads closed at around 135 bps levels higher by 5 bps week-on-week. Credit spreads are likely to take direction from liquidity and supply.

Overnight Index Swaps (OIS) saw swap yields move higher on the back of the MSS ceiling hike. One-year OIS yield rose 9 bps to close last week at 7.27% levels.

The five-year OIS yield closed higher by 9 bps at 7.31% levels. The one-over-five spread closed flat at 4 bps. The curve will remain flat given RBI’s liquidity measures.

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.