Bond Markets to Turn Long Term Bearish

Bond Markets to Turn Long Term Bearish

Bond Market Snapshot For The Week

• Government bond yield spiked as RBI Governor hints about the gap between economy and market in an uncertain scenario and a possible pause in the rate cut
• 10-year benchmark yield closed at 6.14%, up by 17 bps on a weekly basis while the new 10-year paper yield rose by 14 bps to 6.09%
• 5-year OIS yield rose by 4 bps to 4.49% on a weekly basis
• CCIL SDL Index closed at 6.39%, up by 4 bps on a weekly basis
• Liquidity continues to be in surplus at Rs 3.75 trillion

RBI governor came out with worried statements on market behavior and MPC minutes showed high worries on inflation by members. Given the continued high supply of government bonds and SDLs and with switches that increases supply of long end paper, RBI worries on inflation and markets hit bond yields hard. There is nothing to look forward to for traders, as supply and high inflation rules at present.

Markets sold off bonds and the last bond auction saw bid to cover ratio of less than 2, which is the lowest this fiscal year. Auctions will continue to see weak response given the market sentiments.

Will RBI step in to protect yields? The policy stance is accommodative and there is room for rate cuts if economy goes deeper into recession and higher borrowing costs for the government may not be viewed favorably by the policy makers. However, even if RBI intervenes, market will go fresh short at lower levels of yields.

Bonds yields have seen floor at around 5.75% to 5.80% levels for the 10-year bond and traders will build up shorts on any fall in yields towards the floor.

During the week, the new 10-year benchmark yield rose by 14 bps to 6.09%. The benchmark 10-year bond, the 5.79% 2030 bond yield rose by 17 bps to 6.14% on a weekly basis. 6.45% 2029 bond yield increased by 17 bps to 6.24%. 5-year benchmark 5.22% 2025 yield increased by 18 bps to 5.41%. 6.19% 2034 yield level moved up by 17 bps to 6.45%. Long term paper 7.16% 2050 yield level rose by 21 bps to 6.72% on a weekly basis. Gilt securities yield jumped on 21st August as a consequence of RBI Governors statement regarding the economy and possible market correction.

On a weekly basis, the spread of 10-year bond over 3-year bond (6.84% 2022) increased to 184 bps from 172 bps. The spread of 10-year bond over 5-year bond (5.22% 2025) remained flat at 73 bps from 74 bps last week. However, 15-year benchmark (over 10-year benchmark spread declined to 24 bps from 34 bps. In the same line, 30-year benchmark over 10-year benchmark spread came down to 44 bps from 53 bps last week.

In the weekly SDL auction, average 10-year SDL cut-off yield stood at 6.50% as compared to 6.46% during last week. Consequently, spread came down to 51 bps from 56 bps of last week auction.

One-year OIS yield declined by 2 bps to 3.82% while the five-year OIS yield rose by 4 bps to 4.49% 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 3755 billion as of 21st Aug 2020. Liquidity was in a surplus of Rs 2478 billion as of 14th Aug 2020.

Statement of RBI Governor

• Up to banks to extend the moratorium for 3, 6 or 12 months
• Banks can decide today to whom to give moratorium on the basis of the August 6 circular
• KV Kamath Committee will only specify financial parameters to consider, like debt-equity, debt coverage
• Assets that had problems before COVID-19 will need to be resolved under the June 7 circular
• The disconnect between the economy and market is a global phenomenon not just an India-specific issue
• There will definitely be a correction in the future, but we cant say when that will happen
• We are watching the situation and will be ready with measures to cope with market volatility
• We closely monitor development that can impact financial stability
• Have considered the health of banks

USD Stops Fall on Positive Economic Date, but Weakness Stays

Currency Market Snapshot For The Week

• INR appreciated by 0.07% against the USD last week and depreciated by 0.02% against the euro.
• USD rose by 0.16% on a week on week basis and is at a level of 93.25.
• The British pound appreciated by 0.03% against the USD
• Euro depreciated by 0.38% against the USD.

Global Bond Market Snapshot For The Week

• US 10-year benchmark bond yield fell by 7 bps and closed at 0.64% last week.
• German 10-year bond yield fell by 9 bps and is at negative 0.51%.
• Italys 10-year benchmark yield fell by 4 bps to 1.00%.
• US benchmark Junk bond yields rose by 6 bps to 5.63%

INR ended the week marginally higher against USD after exhibiting volatile trading sessions during the week as sustained foreign fund inflows supported the INR along with the weakness in USD seen in the early part of the week, while concerns over rising COVID-19 cases and RBIs higher inflation expectation weighed on investor sentiment. The minutes from the last concluded MPC meet showed that its members have turned more hawkish over inflation, pushing back bets on further rate cuts. INR appreciated by 0.07% against the USD last week and depreciated by 0.02% against the euro.

Additionally, emerging market currencies also got a boost as the Peoples Bank of Chinas on Monday injected liquidity worth USD 101 billion through medium-term lending to support the economy.

USD ended the week higher against major world currencies after the Federal Reserve indicated that it intends to take a more dovish approach to help the U.S. economic recovery in the near future. Further, the release of stronger-than-expected economic data also supported USD. However, the expectation of a swift recovery in the worlds largest economy faded after the US Congress went on a month-long recess without reaching any agreement over details of the stimulus plan. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.16% and is at a level of 93.25.

Meanwhile, a delay in the high-level talks between the US and China was perceived in a positive light as it avoided immediate escalation in tensions. According to reports, the review of Chinas compliance with the phase-one trade deal was delayed as Washington wanted more time to allow Beijing to increase imports of goods.

Data released by the U.S. on Thursday showed that 1.106 million Americans claimed unemployment benefits during the previous week, surpassing the expectation of 925,000 claims as well as last Thursdays 971,000 figure. The Commerce Department reported existing home sales rose by a record 24.7% in July to a seasonally adjusted annual rate of 5.86 million units., beating expectation for a 14.7% rise. IHS Markit data showed flash Composite Purchasing Managers index of 54.7 for August, above forecasts of 51.3.

Weekly Global Bond Market Analysis

US 10-year benchmark bond yield fell by 7 bps last week and is at levels of 0.64% as higher-than-expected initial weekly unemployment claims added to worries over the economic recovery from the coronavirus pandemic. Yields had climbed on Wednesday after minutes from the Federal Reserves July meeting indicated that yield curve control would likely provide only modest benefits in the current environment and was not coming anytime soon.

The minutes also disclosed concern by central bank policymakers that more easing of monetary policy may be needed to nurse the economy through the pandemic.

Eurozone bond yields fell last week after a round of economic data from Europe showed the continents recovery could be faltering as COVID-19 infections have rebounded. German 10-year bond yields fell by 9 bps to negative 0.51%, France 10-year bond yields fell by 7 bps to negative 0.20%. Italys 10-year bond yield fell by 4 bps to a level of 1.00%.

US benchmark Junk bond yield rose by 6 bps and is at 5.63%, Euro benchmark Junk bond yields fell by 4 bps to 3.91%.