The bond market started 2013 with a bang with rallies in both government and corporate issues.
The 10-year benchmark gilt has dropped 10 basis points (bps) and 30-year yields have dropped by 15 bps in the four trading days of this year.
The 8.15% 2022 is trading at 7.93% levels, while the 8.30% 2042 is at 8.12% levels.
Five- and 10-year AAA corporate bond yields have dropped 15 bps each in the same period.
The volumes in government bonds have picked up sharply with trading volumes in the NDS-OM (Negotiated Dealing System-Order Matching) soaring to record highs.
Average daily traded volumes last week were at Rs48,000 crore against volumes of `25,000 crore seen in the week previous to last.
Clearly, there’s bull frenzy largely driven by the Reserve Bank of India’s (RBI) actions. The RBI has been buying bonds through open market operation (OMO)auctions in order to infuse liquidity.
The purchases are taking place on the back of the government running an Rs82,500 crore surplus cash balance as of December 28, 2012. The surplus has created a shortfall in systemic liquidity with banks being forced to borrow over Rs1,12,000 crore from the RBI on a daily average basis last week.
The surplus has enabled the RBI to reschedule the government’s borrowing programme for January-March. This month will only see Rs12,000 crore of supply against twice that originally scheduled. But February will see Rs48,000 crore of supply from the originally scheduled Rs36,000 crore.
The surplus has also put paid to worries of the government exceeding its budgeted borrowing for 2012-13.
The markets were worried that the government would borrow more on the back of fiscal deficit rising to levels of 5.3% of GDP from budgeted levels of 5.1% of GDP.
The bond market is partying on the back of lack of fresh issuances of bonds in January and on the back of the RBI buying bonds through OMOs.
The RBI has bought Rs47,000 crore of bonds in the last one month and this bond purchase has helped take out floating stock from the market.
The market is also confident of repo rate cuts taking place in the RBI policy review on the January 29, 2013. The RBI had guided the markets for rate cuts.
In its December 2012 policy review and the central bank has no reason to reverse its guidance, as there is no cause for sharp rise in inflation or a sharp uptick in economic activity in a one month period.
The bond market may well take down bond yields by another 15bps to 20bps going into the policy review. However, once the policy is over and supply starts in February, which is also the budget month, markets will become cautious. Bond yields will rise from lows in end of January, but that rise could be temporary if the government succeeds in presenting a budget that shows fiscal consolidation.