Comment

The revised government bond borrowing calendar for the weeks leading to end-September is better than market expectations, with a gross borrowing of Rs 1.1 lakh crore.

Weekly auction sizes have been reduced from Rs 15,000 crore to Rs 12,000 crore. The market was expecting a weekly auction size of Rs 15,000 crore and a higher borrowing amount.

The better-than-expected borrowing calendar saw bond yields close better week-on-week, with the long end of the curve rallying sharply on the back of lower supply. The well traded 7.50% 2034 bond saw yields come off by 20 basis points to close the week at 7.76% levels from 7.96% levels. Bond yields are likely to be positive in the coming weeks, on the back of reduced supply uncertainties.

The government borrowing for the weeks leading to September is expected to go smoothly.

The tenure of the bonds to be issued is largely concentrated in the 5-14 years segment, where demand from the banking system is high.

The Reserve Bank of India has a lot of space left in its open market operation purchase target for the first half of 2009-10. The RBI’s purchase target is Rs 80,000 crore, while the central bank has bought back bonds of around Rs 30,000 crore so far.

Technically, the RBI can buy back just under half of the Rs 1.1 lakh crore of government bonds to be auctioned in the coming weeks. If the RBI buys back bonds at the short end of the curve through OMOs, the bond auctions are likely to see lower cut-offs in terms of yields.

The government, by the end of first half of fiscal 2009-10, would have completed Rs 2.99 lakh crore of gross borrowing. The borrowing for the full year 2009-10 is targeted at Rs 4.5 lakh crore, which includes Rs 28,000 crore of desequestered market stabilisation scheme bonds.

Inflation as measured by the wholesale price index came in above market expectations of negative 1.21% at negative 1.38% for the week ended July 4.

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 1,30,000 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 long bonds rally on reduced supply. The well traded 7.50% 2034 bond saw yields rally by 20 bps to close the week at 7.76% levels. The new 10-year benchmark bond, the 6.9 % 2019 note, saw yields move down by 2 bps to close the week at 6.86% levels. The market gave up gains in this bond to position itself ahead of fresh supply this week.

The five-year benchmark bond — the 6.07% 2014 bond — saw yields move up by 4 bps week-on-week on concerns of oversupply at the short end of the curve. The well traded 7.94% 2021 bond saw yields drop 18 bps week-on-week as the market grabbed an opportunity to bring down the spreads over the 10-year benchmark bond.

The government auctioned Rs 12,000 crore of bonds last week. The bonds auctioned were the 6.07% 2014 bond for Rs 6,000 crore, the 7.94% 2021 bond for Rs 4,000 crore and the 7.40% 2035 bond for Rs 2,000 crore. The cut-offs came in at 6.49%, 7.17% and 7.74% respectively.

The government is auctioning Rs 12,000 crore of bonds this week. The bonds to be auctioned are the 6.49% 2015 bond for Rs 6,000 crore and the 6.90% 2019 bond for Rs 6,000 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 91-day T-bill auction held on July 15 coming in at 3.28%, against a cut-off of 3.23% in the previous auction. The 364-day T-bill auction saw the cut-off coming in at 3.69%, against a cut-off of 3.81% in the previous auction. The RBI is auctioning Rs 8,000 crore of 91-day T-bills and Rs 1,500 crore of 18-day T-bills this week.

Corporate bond yields were lower week-on-week on the back of good bidding interest across market segments. The five-year benchmark bonds traded at 7.90% levels, down 15 bps week-on-week, while 10-year benchmark bonds traded at 8.54% levels, down 9 bps week-on-week.

Five-year spreads closed lower by 20 bps at 130 bps levels while 10-year spreads closed lower by 15 bps at 150 bps levels. The market will wait for fresh supply before taking a further call on credit spreads.

Overnight index swaps (OIS) saw the curve move up week-on-week on the back of rise in global bond yields. The five-year OIS yield closed up 13 bps at 6.20% levels while the one year OIS yield closed down 4 bps at 4.07% levels. The OIS curve is likely to be range-bound in the coming weeks.

Smooth sailing
The government borrowing for the weeks leading to September is expected to go smoothly.

The tenure of the bonds to be issued is largely concentrated in the 5-14 years segment.

The RBI has a lot of space in its OMO purchase target for the first half of 2009-10 — it has bought back bonds of around Rs 30,000 crore so far, against a target of Rs 80,000 crore.

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