When supply is the Only constant, RBI carry makes money for traders temporarily

       •    Union Government of India revised aggregate borrowing to Rs 4.88 trillion during H2FY21

·         5.79% 2030 bond yield closed at 5.93%, up by 3 bps while 5.77% 2030 bond yield closed at 5.93%, down by 1 bps

        •   5-year OIS yield came down by 3 bps to 4.4%

        •   Liquidity stood at Rs 2.89 trillion as compared to Rs 2.7 trillion previous week

Central government has increased its borrowing to compensate states for gst shortfall and will probably increase borrowing further given fall in own revenues due to covid related slowdown. States too would have to borrow more on the back of revenue shortfalls. Read our coverage on government borrowing here.

The bond market is now absorbing weekly supply, upwards of Rs 300 billion and has been absorbing weekly supply of over Rs 400 billion in the last 6 months. The supply inundation has led to a steep yield curve with the spread of the 1 year tbill to the 10 year bond at levels of over 250bps.  SDLs too have seen spreads rise to 85bps from levels of around 60bps despite RBI announcing SDL OMO purchases for the first time ever.

Bond markets are finding no joy in a directional play on yields, with upsides being capped by RBI and downsides being capped by supply. In this scenario, the market is just playing a classical carry game, which is the different in cost of borrowing at levels of below 4% to 10 year yield at 5.9% and longer end yields at levels of over 6.25%. RBI is enabling this carry by explicitly protecting the yield curve. 

The carry game will last until RBI faces pressure on higher inflation expectations and when this happens, the nimble will be the ones to survive the carnage in yields.

During the week, the 5.77% 2030 yield decreased by 1 bps to 5.93%, the 5.79% 2030 bond yield rose by 3 bps to 5.93%, while 6.45% 2029 bond yield declined by 2 bps to 6.02%. 5-year benchmark 5.22% 2025 yield increased by 3 bps to 5.27%. 6.19% 2034 yield level remained unchanged at 6.28%. Long term paper 7.16% 2050 yield rose by 3 bps to 6.77%

The spread of 10-year bond over 5-year bond (5.22% 2025) remained unchanged at 66 bps. The 15-year benchmark over 10-year benchmark spread came down to 33 bps from 39 bps.  30-year benchmark over 10-year benchmark spread increased to 81 bps from 65 bps.

In the weekly SDL auction, the average 10 years SDL cut-off yield stood at 6.63%. Spread over benchmark 10-year yield remained flat 85 bps from 87 bps of previous week auction.

One-year OIS yield came down by 3 bps to 3.72% while the five-year OIS yield declined by 3 bps to 4.4% 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 2889 billion as of 16th Oct 2020. Liquidity was in a surplus of Rs 2693 billion as of 09th Oct 2020.