RBI is Intent on Keeping Down Yields, Shackling Market Shorting Intentions
USD Claws Back Some Losses on Unemployment Rate Fall
RBI is Intent on Keeping Down Yields, Shackling Market Shorting Intentions
Bond Market Snapshot For The Week
- RBI conducted special OMO (Operation Twist) of Rs 171 billion on 3rd September out of Rs 200 billion notified amount
- 5.79% 20230 closed at 5.95%, down by 15 bps on a weekly basis while 5.77% 2030 yield came down 21 bps to 5.93%
- 5-year OIS yield declined by 16 bps to 4.47% on a weekly basis
- CCIL SDL Index closed at 6.34%, down by 21 bps on a weekly basis
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Liquidity continues to be in surplus at Rs 4.54 trillion
In normal times, high government bond supply and inflation trending at higher than RBI target levels would push up bond yields, as markets would increasing the risk premium on bonds. However, given the pandemic that has led to a steep fall in GDP for the 1st quarter of fiscal 2020-21, RBI is intent on supporting government borrowings at low yields and when markets took up yields by 40bps post release of hawkish RBI August policy minutes, the central bank came out with supportive measures and a strong statement on keeping down yields.
Read our note on the bond yield movement post RBI measures for details.
Bond markets inherent intention is to play on the short side, as low yields are not sustainable given deficit. However, with RBI intent on keeping yields down, the market will be reluctant to build shorts and will continue to show its short side in Auctions.
Last week, all gilt securities experienced a fall in yields as compared to the previous week. During the week, the 5.77% 2030 yield came down by 21 bps to 5.93%, the 5.79% 2030 bond yield fell by 15 bps to 5.95% on a weekly basis. 6.45% 2029 bond yield decreased by 22 bps to 6.05%. 5-year benchmark 5.22% 2025 yield declined by 29 bps to 5.24%. 6.19% 2034 yield level came down by 24 bps to 6.25%. Long term paper 7.16% 2050 yield lost 14 bps to 6.61% on a weekly basis.
On a weekly basis, the spread of 10-year bond over 3-year bond (6.84% 2022) remained flat at 161 bps from 162 bps. The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 71 bps from 57 bps last week. However, 15-year benchmark over 10-year benchmark spread declined to 31 bps from 38 bps. 30-year benchmark over 10-year benchmark spread remained flat at 63 bps from 62 bps last week.
In the weekly SDL auction, the average 10 years SDL cut-off yield stood at 6.46% as compared to 6.65% during last week. Spread over benchmark 10-year yield rose to 55 bps from 49 bps of last week auction.
One-year OIS yield came down by 3 bps to 3.84% while the five-year OIS yield declined by 16 bps to 4.47% on a weekly basis.
System liquidity as measured by bids for Repo, Long Term Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI, drawdown from Standing Facility (MSF or Marginal Standing Facility) and CMB was in surplus of Rs 4543 billion as of 4th Sep 2020. Liquidity was in a surplus of Rs 3732 billion as of 28th Aug 2020.
| Government Bond Yields | Friday, September 4, 2020 | Friday, August 28, 2020 | Change in bps |
|---|---|---|---|
| 5.22% 2025 | 5.24% | 5.53% | -29 |
| 6.18% 2024 | 5.14% | 5.37% | -23 |
| 7.17% 2028 | 5.99% | 6.23% | -24 |
| 6.45% 2029 | 6.05% | 6.27% | -22 |
| 5.79% 2030 | 5.95% | 6.10% | -15 |
| 5.77% 2030 | 5.93% | 6.14% | -21 |
| 6.68% 2031 | 6.24% | 6.44% | -20 |
| 6.19% 2034 | 6.25% | 6.49% | -24 |
| 7.16% 2050 | 6.61% | 6.75% | -14 |
| Average Traded volumes NDS OM Rs Billion | 3.05 | 4.25 | -1.2 |
| Liquidity Rs Billion | - | - | - |
| Reverse Repo (Fixed Rate) | -7281.23 | -6443.63 | -837.6 |
| Repo (Fixed Rate) | - | - | - |
| Long Term Repo | 2380.17 | 2380.17 | 0 |
| MSF | 0.05 | 0 | 0.1 |
| SLF | 358 | 331.41 | 26.6 |
| MSS (T-Bills & CMB) (Total Outstanding) | 0 | 0 | 0 |
| Reverse Repo (Variable rate) | 0 | 0 | 0 |
| Repo (Variable rate) | 0 | 0 | 0 |
| Overnight Index Swap Yields | - | - | - |
| 1 Year | 3.83% | 3.87% | -4 |
| 5 year | 4.47% | 4.63% | -16 |
| Spread | 0.64% | 0.76% | -12 |
| T-bill Auction Yields | - | - | - |
| 91 day T-bill | 3.19% | 3.24% | -5 |
| 364 day T-bill | 3.57% | 3.59% | -2 |
USD Claws Back Some Losses on Unemployment Rate Fall
Currency Market Snapshot For The Week
- INR appreciated by 0.35% against the USD last week and appreciated by 0.91% against the euro.
- USD rose by 0.38% on a week on week basis and is at a level of 92.72.
- The British pound depreciated by 0.55% against the USD
- Euro depreciated by 0.55% against the USD.
Global Bond Market Snapshot For The Week
- US 10-year benchmark bond yield remained flat at 0.72% last week.
- German 10-year bond yield fell by 6 bps and is at negative 0.47%.
- Italys 10-year benchmark yield rose by 4 bps to 1.08%.
- US benchmark Junk bond yields remained flat at 5.37%
INR ended the week higher against the USD last week as RBI refrained itself from aggressively intervening in the foreign exchange market. The demand for INR last week was also underpinned by an improvement in sentiment for emerging market assets and due to weakness in the USD seen amid expectations of further accommodative measures by the US Federal Reserve. INR appreciated by 0.35% against the USD last week and appreciated by 0.91% against the euro.
Last week in a note announcing the `Measures to Foster Orderly Market Conditions, the central bank has slipped in a message that it is worried about inflation and it wont hesitate to use measures other than interest rates to fight price pressures.
Read our analysis on RBI is Playing a Dangerous Game with Markets on INR.
Hopes of development of a COVID-19 vaccine also provided some support to the emerging market currencies. According to reports, the US Centers for Disease Control and Prevention had asked states to be ready for a vaccine by Nov 1.
The way the pace of the enrolment is going on and the level of the infections that are going on in the US, it is likely that well get an answer by the end of the year, US infectious disease expert Anthony Fauci said on Tuesday.
USD ended the week higher against major world currencies despite Job growth in the U.S. slowing in the month of August as U.S. companies added approximately 1.37 million people to payrolls, down from 1.73 million in July. However, the unemployment rate improved dramatically, falling to 8.4% from 10.2%, and, most importantly, average hourly earnings rose 0.4%. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.38% and is at a level of 92.72.
Manufacturing activity in the US remained in the expansionary territory, as indicated by the above 50-mark reading. Data released by the Institute for Supply Management showed that the manufacturing purchasing manager index rose for the third straight month to 56.0 in August from 54.2 in July.
USD started the week on a lower note as US Fed is expected to leave its interest rates at zero for longer than anticipated earlier, in an effort to propel growth, which has been hit by the COVID-19 crisis. On Monday, Fed Vice Chair Richard Clarida said yield curve control was an option going ahead, but asset purchases and guidance on a further trajectory on rates were the best options in a zero-interest rate environment. The central banks new policy framework did not warrant a hike in rates only because the unemployment rate was low, he added.
This comes after Fed Chair Jerome Powell earlier shifted the policy framework to target inflation averaging 2% over a period of time, a move that was highly anticipated by financial markets for a fillip to the economy.
Chicago Fed President Charles Evans said on Thursday the bank could promise to keep interest rates pinned near zero until inflation reaches 2.5%, well above current low levels and modestly above the inflation target of 2%.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yield remained flat last week at 0.72%, yields fell by 4-6 bps in the early part of the week on the prospect of near-zero interest rates for longer than the anticipated period of time. However, the yield rose on Friday as the unemployment rate fell sharply to 8.4%, from 10.2% in July.
Eurozone bond yields fell last week as data showed that inflation in the region turned negative in August for the first time since May 2016 at minus 0.2%. German 10-year bond yields fell by 6 bps to negative 0.47%, France 10-year 7bond yields fell by 6 bps at negative 0.17%. Italys 10-year bond yield rose by 4 bps to a level of 1.08%.
US benchmark Junk bond yield remained flat at 5.37%, Euro benchmark Junk bond yields fell by 17 bps to 3.70%.
| Currencies | 04-Sep-20 | 28-Aug-20 | 04-Sep-19 | Weekly Return | Yearly Returns |
|---|---|---|---|---|---|
| DXY | 92.72 | 92.37 | 98.41 | 0.38% | -5.79% |
| USD-BRL | 5.3018 | 5.3893 | 4.1111 | 1.65% | -22.46% |
| EUR-USD | 1.1838 | 1.1903 | 1.2334 | -0.55% | -4.02% |
| GBP-USD | 1.3279 | 1.3352 | 1.1035 | -0.55% | 20.34% |
| USD-RUB | 75.4277 | 74.0332 | 66.241 | -1.85% | -12.18% |
| AUD-USD | 0.7282 | 0.7365 | 0.6815 | -1.13% | 6.85% |
| NZD-USD | 0.6721 | 0.6743 | 0.6374 | -0.33% | 5.44% |
| USD-JPY | 106.24 | 105.37 | 106.94 | -0.82% | 0.66% |
| EUR-JPY | 125.77 | 125.39 | 117.89 | -0.30% | -6.27% |
| USD-KRW | 1,189.74 | 1,184.48 | 1,200.30 | -0.44% | 0.89% |
| USD-PHP | 48.615 | 48.468 | 51.944 | -0.30% | 6.85% |
| USD-IDR | 14,750.00 | 14,632.00 | 14,155.00 | -0.80% | -4.03% |
| USD-INR | 73.14 | 73.4 | 71.85 | 0.35% | -1.77% |
| EUR-INR | 86.625 | 87.4114 | 79.426 | 0.91% | -8.31% |
| USD-CNY | 6.8425 | 6.8655 | 7.1489 | 0.34% | 4.48% |
| USD-MYR | 4.1475 | 4.164 | 4.1873 | 0.40% | 0.96% |
| USD-THB | 31.392 | 31.097 | 30.675 | -0.94% | -2.28% |
| Countries | 05-Sep-20 | 28-Aug-20 | Weekly Change (bps) |
|---|---|---|---|
| US | 0.72% | 0.72% | 0 |
| Japan | 0.04% | 0.05% | -1 |
| UK | 0.27% | 0.31% | -4 |
| Germany | -0.47% | -0.41% | -6 |
| Portugal | 0.38% | 0.39% | -1 |
| Italy | 1.08% | 1.04% | 4 |
| France | -0.17% | -0.11% | -6 |
| Greece | 1.13% | 1.09% | 4 |
| Spain | 0.36% | 0.37% | -2 |
| Brazil | 6.71% | 6.32% | 39 |
| Russia | 6.15% | 6.24% | -9 |
| China | 3.14% | 3.09% | 5 |
| South Africa | 9.23% | 9.32% | -9 |
| Australia | 0.96% | 1.01% | -5 |
| India | 5.93% | 6.14% | -21 |
| Indonesia | 7.03% | 6.94% | 9 |