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ShareMumbai: The bond market sentiment is turning positive with government bond auctions seeing healthy demand at lower levels of yields.
The 10-year benchmark bond, the 6.05% 2019 gilt, rallied 25 basis points week-on-week to close at 6.70% levels. The Rs 80,000 crore of the security offered in the government bond auction on April 8, 2009, saw healthy demand across investor segments, with the cut-off coming in at 6.75% levels.
The cut-off on the 6.05% 2019 bond in the previous auction, on March 27, 2009, had come in at 6.97% levels, with a part of the auction being devolved on primary dealers. The reason for the turn in sentiments is high system liquidity, light market positions, successful OMO (open market operation) bond purchase and bond redemptions of Rs 39,000 crore.
The system liquidity saw bids for reverse repo touch all-time highs of Rs 1,30,000 crore. Liquidity came back into the market with a bang on the back of government spending and bond redemptions. The market was light on positions with March seeing the Reserve Bank of India buying Rs 41,500 crore of government bonds against bond auctions of Rs 46,000 crore.
The Rs 39,000 crore of government bond redemptions helped further lighten the market positions. A segment of the market was also short on government bonds, given that the market had sold off in March with the 10-year bond yield moving up almost 100bps to 7% levels. The short/light market positions created inherent demand for government bonds. The first of the Rs 6,000 crore of bond purchase by RBI went off smoothly with the central bank buying the full OMO purchase amount.
The market is slowly getting adjusted to the heavy supply of government bonds. This week will see the government auction Rs 12,000 crore of bonds. The securities on offer are the five-year benchmark -- the 7.56% 2014 bond -- for Rs 8,000 crore and the 8.24% 2027 for Rs 4,000 crore.
The five-year benchmark bond rallied 45bps from the previous auction cut-off (held on April 3) of 6.80% on the back of liquidity-driven buying. The auction will see healthy demand for the bonds on offer, given the high system liquidity.
Inflation as measured by the wholesale price index printed at 0.26% for the week ended March 28, 2009. Index of industrial production (IIP) growth came in negative 1.2% for February 2009. April-February 2008-09 IIP growth is at 2.8% against 8.8% for the same period last year. Export growth for March 2009 is placed at negative 18%, the sixth month of negative export growth. Weak economic data will drive RBI to keep policy rates at all-time lows to spur economic growth.
Liquidity, as measured by bids for reverse repo/repo in the liquidity adjustment facility auction of RBI, surged, with bids for reverse repo crossing Rs 1,30,000 crore. Overnight rates crashed with call rates at 3.5% levels and CBLO and repo rates at below 1% levels. Liquidity will continue to be high in the system, keeping overnight rates below 1% levels.
Government Bonds
Government bonds saw yields move down on improved market sentiments. The benchmark 10-year bond, the 6.05% 2019 note, saw yields lower by 25bps week-on-week to close at 6.70% levels. Yield on the five-year benchmark, the 7.56% 2014 bond, closed down 45 bps at 6.35% levels while the long bond -- 6.83% 2039 -- saw yields come off by 20bps to close at 7.60% levels.
RBI conducted a Rs 6,000 crore OMO purchase auction last week. The bonds purchased were the 7.59% 2016, 7.49% 2017, 8.35% 2022, 7.95% 2032 and the 8.33% 2036 securities. The cut-offs came in at 6.90%, 6.91%, 7.60%, 7.74% and 7.75%, respectively.
The Rs 12,000 crore government bond auction held last week saw the cut-off on Rs 8,000 crore of the 6.05% 2019 security coming in at 6.75% and on Rs 4,000 crore of 7.50% 2034 security coming in at 7.74%. The government is auctioning Rs 8,000 crore of 7.56% 2014 bonds and Rs 4,000 crore of 8.24% 2027 bonds this week under uniform price method.
Treasury bills, corporate bonds and overnight index swaps
Treasury bill (T-bill) yields were lower in the T-bill auctions last week, with the cut-off on the 91 day T-bill auction held on April 8 coming in at 4.09% against a 4.50% cut-off seen in the previous auction. The 364 day T-bill auction saw the cut-off coming in at 4.40% against 5.50% in the previous auction.
RBI is auctioning Rs 8,000 crore of 91 day T-bills and Rs 2,000 crore of 182 T-bills this week. Corporate bond yields were lower week-on-week on the back of good buying interest at absolute levels of yields. Credit spreads came off on the back of a sharp fall in corporate bond yields. Five-year benchmark bonds traded at 7.90% levels while 10-year benchmark bonds traded at 8.65% levels. The 10-year spreads closed at 188 bps levels, down almost 12bps week-on-week, while five-year spreads closed at 137bps levels, down 7bps week-on-week.
Corporate bond yields are likely to remain well bid on lack of supply and attractive absolute levels of yields. Overnight index swaps (OIS) saw the curve fall on better bond market sentiments. The one year OIS yield closed down 3bps at 3.82% levels while the five-year OIS yield closed down 7bps at 5.40% levels. The one-over-five spread flattened by 4bps to close at 158bps levels. The OIS curve is likely to flatten further on the back of positive government bond sentiments.
Disclaimer: The author is head-fixed income, IDFC Mutual Fund. Views are personal.
