Comment

Liquidity likely to be pressured due to advance tax outflows

Bond yields rose across the curve as global oil prices surged and domestic inflation numbers came in higher than expected. The ten-year benchmark bond yields moved higher by 2 basis points while long bond yields rose by 8 bps week-on-week.

The ten- over-thirty segment of the curve steepened by 6 bps to close the week at 47 bps spread. The ten-over-thirty spread has moved higher by 17 bps from lows of around 30 bps seen a month ago.

The long bonds were sold as expectations of rate cuts by the RBI (Reserve Bank of India) dimmed on fast rising oil prices and higher trending inflation. Oil prices touched highs of $106/bbl on the Nymex on the back of a steadily weakening US dollar.

The dollar fell to new low against the euro at dollar 1.54 levels while it touched multi-year lows against the Japanese yen at 102 levels. The dollar is weakening against majors on the back of high expectations of rate cuts by the US Federal Reserve. The US economy shed jobs in February with non-farm payrolls falling by 63,000, strengthening the recession views.

The dollar weakness against majors did not percolate to the rupee, which depreciated by over a 1% week-on-week. The rising oil prices and falling equity markets took its toll on the rupee.

Inflation as measured by the WPI (wholesale price index) came in higher than expectations for the week ended February 23. Inflation came in at 5.02% against market expectations of 4.80%. The central bank and the government are keen on keeping inflation under check leading to higher probability of the RBI holding interest rates at current levels.

Liquidity as measured by bids for reverse repo/repo in the LAF (liquidity adjustment facility) of the RBI was easy with bids for reverse repo at 6% averaging around Rs 4,400 crore for the last week.

Liquidity was negative in the week before last. Overnight rates trended lower and hovered around reverse repo rate of 6%. Liquidity is likely to be pressured in the coming weeks on account of advance tax outflows.

Government bonds
Government bonds saw yields rise week-on-week. The yield on the benchmark ten-year bond 7.99% 2017 bond was higher by 2 bps to close at 7.59% levels. Five-year benchmark bond yields was higher by 3 bps with the yield on the 7.27% 2013 bond closing at 7.58% levels.

Yields on the long bond the 8.33% 2036 bond closed higher by 8bps at 8.05% levels. The ten-over-thirty spread closed higher by 7 bps at 47 bps levels. Outlook for bonds is uncertain given high oil prices and steadily higher trending inflation.

Treasury bills, corporate bonds and overnight index swaps
Treasury bills (T-bills) yields were lower last week. The cut off on the 91-day T-bill auction held on March 5 came in at 7.39% against a cut-off of 7.44% seen in the previous auction. The 182-day T-bill auction saw the cut-off coming in at 7.53% against a similar cut-off seen in the previous auction.

The RBI is auctioning Rs 500 crore of 91-day and Rs 1,000 crore of 364-day T-bills this week.

Corporate bonds saw yields move higher across the curve. One year papers were quoted at 9.95% levels against 9.80% levels seen in the week earlier to last. Five-year bonds were quoted at 9.35% levels up by 10 bps week on week.

The five-year AAA bond spreads were higher by around 7 bps week-on-week at 163 bps levels. Spreads are likely to remain pressured on uncertain economic environment.

Overnight Index Swaps (OIS) saw the swap curve move higher on negative interest rate sentiments. One year OIS yields moved up by 3 bps to closelast week at 7.11% levels while the five year OIS yields closed higher by 19 bps at 7.06% levels.

The one-over-five spread flattened from negative 21 bps levels to negative 5 bps levels. OIS yields are expected to remain choppy given uncertain interest rate outlook.

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.