Appetite for Government Bonds at Current Levels is Just Not There

Appetite for Government Bonds at Current Levels is Just Not There

Bond Market Snapshots for the week

• 5.79% 20230 bond yield closed at 6%, up by 5 bps on a weekly basis while 5.77% 2030 bond yield was up by 11 bps at 6.04%
• 5-year OIS yield rose by 8 bps to 4.55% on a weekly basis
• CCIL SDL Index closed at 6.43%, up by 9 bps on a weekly basis
• Liquidity continues to be in surplus at Rs 3.66 trillion

RBI devolved the full auction of the Rs 180 billion benchmark 10 year bond, the 5.77% 2030 bond, on to the Primary Dealers indicating its preference for lower yield cut off in the auction. The devolvement was at levels of 6.02%. This is the second consecutive devolvement for the full auction of Rs 180 billion of the 5.77% 2030 bond, the devolvement was at yields of 6.14% on the 28^th of August.

Post the August devolvement, RBI came out with measures to support the bond market and government borrowing and yields trended down to below 6%, enabling primary dealers to offload inventory at lower yields to the devolved yield of 6.14%. However, this time around, PDs may not get a chance to sell down inventory at a profit and may stare at losses if RBI does not come out with concrete steps to keep down government borrowing costs.

The bond market clearly has no appetite for bonds at lower yields given huge supply in prospect. Government could well announce a larger than budgeted borrowing program for the 2^nd half of this fiscal year and this is unnerving markets. Even if RBI steps in to buy bonds through OMOs, the supply will still come to the market and yields will still rise, as markets are not comfortable with yields at lower levels given the fiscal stress of central government and state governments.

Last week, all gilt securities exhibited uptrend in yields as compared to the previous week. During the week, the 5.77% 2030 yield rose by 11 ps to 6.04%, the 5.79% 2030 bond yield increased by 5 bps to 6%, the 6.45% 2029 bond yield gained 13 bps to 6.18%. 5-year benchmark 5.22% 2025 yield went up by 27 bps to 5.51%. 6.19% 2034 yield level rose by 9 bps to 6.34%. Long term paper 7.16% 2050 yield increased 8 bps to 6.69% on a weekly basis.

On a weekly basis, the spread of 10-year bond over 3-year bond (6.84% 2022) declined to 152 bps from 161 bps. The spread of 10-year bond over 5-year bond(5.22% 2025) came down to 49 bps from 71 bps. The 15-year benchmark over 10-year benchmark spread rose to 38 bps from 31 bps. 30-year benchmark over 10-year benchmark spread increased to 73 bps from 63 bps.

In the weekly SDL auction, the average 10 years SDL cut-off yield stood at 6.64% as compared to 6.46% during last week. Spread over benchmark 10-year yield rose to 64 bps from 55 bps of last week auction.

One-year OIS yield rose by 3 bps to 3.86% while the five-year OIS yield increased by 8 bps to 4.55% 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 3663 billion as of 11th Sep 2020. Liquidity was in a surplus of Rs 4543 billion as of 4th Sep 2020.

Weekly Fixed Income Movement

INR Lower amid USD Broad Strength - Weekly Currency and Global Bond Analysis

Currency Market Snapshot for The Week

• INR depreciated by 0.54% against the USD last week and depreciated by 0.51% against the euro.
• USD rose by 0.66% on a week on week basis and is at a level of 93.33.
• The British pound depreciated by 3.64% against the USD
• Euro appreciated by 0.07% against the USD.

Global Bond Market Snapshot for The Week

• US 10-year benchmark bond yield fell by 5 bps to 0.67% last week.
• German 10-year bond yield fell by 2 bps and is at negative 0.48%.
• Italy's 10-year benchmark yield fell by 4 bps to 1.04%.
• US benchmark Junk bond yields rose by 15 bps and is at 5.52%

INR ended the week lower against USD last week amid broad strength in USD, however the downside remains limited largely due to the expectation for foreign fund inflows. INR depreciated by 0.54% against the USD last week and depreciated by 0.51% against the euro.

On Wednesday, RIL had said that Silver Lake Partners would invest Rs 75 billion in Reliance Retail for 1.75% stake in the company. This amounts to a little over USD 1 billion at the prevailing exchange rate. Abu Dhabi Investment Authority, Mubadala Investment Co of Abu Dhabi, and KKR are also reportedly keen on buying stake in the retail venture.

USD last week traded higher against major world currencies with the sharp selloff in U.S. equity markets prompting market participants to sell riskier currencies in favor of the world's reserve currency and also the continuing deadlock over the coronavirus relief bill in the Congress provided support to the USD. However, the gain remained capped as euro showed strength on Friday after Thursdays European Central Bank meeting. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.66% and is at a level of 93.33.

In the US, the political deadlock over the coronavirus relief bill in the Congress continued as Democrats blocked a USD 300 billion stimulus bill on Thursday. Unemployment benefits claims in the US also remained elevated at 884,000 in the week ended Sep 5, and jobless claims inched up to 13.39 million, indicating that recovery in the world's largest economy had stalled.

President Christine Lagarde spurred a rally in the euro in the later part of the week after she delivered relatively mild comments on the euros surge. Euro has jumped more than 10% against the USD since March and is near its strongest level in more than two years.

The ECB left its key interest rates and the size of asset purchases unchanged, as expected, and reiterated that it stands ready to make adjustments to its tools when needed along with a slightly more optimistic outlook for euro-area economy. President Christine Lagarde said that The exchange rate must be monitored for its impact on prices.

Meanwhile, emergency talks between the U.K. and EU kicked off over the former's plan to undercut parts of the Withdrawal Agreement. European Commission Vice President Maros Sefcovic has expressed concerns about the plan and the EU has warned that if the UK new bill was to be implemented it will constitute a serious violation of the Withdrawal Agreement and of international law. British pound depreciated sharply by 3.64% against USD last week.

Weekly Global Bond Market Analysis

US 10-year benchmark bond yield fell by 5 bps last week and is at 0.67% after better-than-expected demand seen in the last auction with bond buyers digesting USD 23 billion of U.S. Treasury 30-year bonds, making up for the lack of interest in the earlier auctions.

Meanwhile, continuing jobless claims, or the number of people already receiving benefits, rose by 93,000 to a seasonally adjusted 13.39 million in the seven days ended Aug. 29. It was the first increase in five weeks. Producer prices in the U.S. rose 0.3%, slightly higher than the expectation but cooling from a 0.6% jump in the previous month.

Eurozone bond yields fell last week as the European Central Bank left its policy unchanged. German 10-year bond yields fell by 2 bps to negative 0.48%, France 10-year bond yields fell by 2 bps at negative 0.19%. Italys 10-year bond yield fell by 4 bps to a level of 1.04%.

US benchmark Junk bond yield rose by 15 bps to 5.52%, Euro benchmark Junk bond yields rose by 2 bps to 3.72%.

AAA PSU 5-year Spreads are Tight at 14 bps - Weekly Credit Market Analysis 14^th September 2020

Credit Spreads Snapshot For The Week
3- and 12-Months CD yields rose by 5-6 bps.

• 3- and 12-Months CD yields rose by 5-6 bps.
• 3 and 12 Months NBFC CP yields rose by 5-13 bps.
• Sundaram Home Finance Ltd, AA+ rated, issued Rs 5 billion, 13-year bond at 8.93%, 249 bps spreads
• NHAI Ltd, AAA, issued Rs 60 billion, 20-year bond at 7.14%, 57 spreads
• FII debt utilization status stood at 31.85% of total limits. FIIs investment in bonds were down by Rs 2.89 billion last week

AAA PSU 5-year spreads for NABARD and similar bonds are at 14 bps, which are too tight and most likely to rise as interest rates move up while REC/PFC category 5-year spreads are at 56 bps and again most likely to rise. In the last one week, AAA PSU 10-year spreads rose by 7 bps and 2-year spreads rose by 16 bps. HFC 10-year spreads rose by 7 bps and 5-year spreads fell by 14 bps while AAA NBFC spreads for 2 and 5 years rose by 7-27 bps.

As per RBI data, from March-end 2020 to August 2020 period total CP outstanding rose 8.15% to Rs 3726 billion.

During the week, Bharti Telecom Ltd 1.5-year bond was trading at 5.5%, at spreads of 135 bps. L&T Finance 3 year bond was trading at 6.90%, at spreads of 237 bps, TATA Capital Financial Services Ltd.1 year bond was trading at 4.99%, at spreads of 118 bps

Spread Movement 11^th September 2020