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ShareThe one-over-10 spread on the government bond curve is at around 300 basis points, while the spread of the 10-year bond to the reverse repo rate of 3.25% is at 375 bps. The short-end rates are low on the back of the Reserve Bank of India reducing policy rates to all-time lows while keeping system liquidity high. The long end of the curve sold off on worries of high government borrowing and on worries of inflation arising due to loose monetary and fiscal policies.
The RBI, in the first quarter review of the annual monetary policy for 2009-10, has indicated that it will maintain an accommodative policy stance until they see
signs of sustainable economic growth and on the government going back to fiscal consolidation. The RBI has also sounded caution on the impact of loose monetary policies on inflation.
The RBI policy stance indicates that the rates will be kept low in the economy and liquidity will be maintained at high levels until there are definite signs of sustainable economic growth along with low inflation expectations.
Given that short-end rates cannot fall further, as no rate cuts are envisaged in the near future, the market will look at the long end of the curve for opportunities.
The 10-year benchmark bond yields are at 7% levels on the back of high government bond supply. The RBI has indicated that it is very much for rates coming off in the economy for credit to flow at cheaper levels.
The apex bank will intervene when it sees rates moving higher. The central bank has enough legroom on the open market operations window to support government borrowing. The government finances are also much better with the government maintaining clean balances with the RBI for over a month, leaving enough space to tweak the borrowing calendar if they see yields moving up further.
On the back of this, the 10-year bond will find support at 7% levels and the market will look at trading opportunities around these levels. Inflation as measured by the wholesale price index came in at negative 1.54% for the week ended July 18, against expectations of --1.46%. Inflation is likely to stay negative in the coming 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 RBI remained high with bids for reverse repo crossing Rs 1,20,000 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 move up week-on-week on the back of nervousness on inflation and withdrawal of accommodative policy. The 10-year benchmark bond, the 6.90% 2019 bond, saw yields move up by 8 bps to close the week at 7% levels. The five-year benchmark -- the 6.07% 2014 bond -- saw yields move up by 15 bps to close at 6.74% levels, while the well traded 7.94% 2021 bond saw yields move up by 7 bps to close at 7.36%.
The long bond, the 7.40% 2035 security, saw yields move up by 7 bps to close at 7.87% levels. 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 8.24% 2027 bond for Rs 2,000 crore. The cut-offs came in close to market expectations at 6.73%, 7.33% and 7.77%, 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 4,000 crore, the 6.90% 2019 bond for Rs 6,000 crore and the 7.40% 2035 bond for Rs 2,000 crore.
Treasury bills, corporate bonds and overnight index swaps Treasury bill (T-bill) yields were lower in the 91-day T-bill auction held last week with the cut-off on the 91-day T-bill auction held on July 29 coming in at 3.20% against a cut-off of 3.28% in the previous auction. The 364-day T-bill auction saw the cut-off coming in at 3.80% against a cut-off of 3.69% in the previous auction. The RBI is auctioning Rs 8,000 crore of 91-day T-bills and Rs 1,500 crore of 182-day T-bills this week.
Corporate bond yields were higher week-on-week on the back of higher government bond yields. Five-year benchmark bonds traded at 8.15% levels, up 20 bps week-on-week while 10-year benchmark bonds traded at 8.68% levels, up 8bps week-on-week. Five-year spreads closed flat at 130 bps levels, while 10-year spreads closed almost unchanged at 150 bps levels.
Overnight index swaps (OIS) saw the curve flatten week-on-week on the back of worries of liquidity tightening. The five-year OIS yield closed up 2 bps at 6.35% levels while the one year OIS yield closed up 13 bps at 4.28% levels. The OIS curve is likely to take its cue from government bond movements this week.
