Bond Market Snapshot For The Week
· Union Government announces Rs 20 trillion of fiscal stimulus,
· Bond switch auction for Rs 300 billion to add supply of 10 year bond
· New 10 year benchmark yield stood at 5.75%, up by 1 bps on a weekly basis
· 5-year OIS yield fell by 15 bps
· CCIL SDL Index closes at 6.49%, declined by 16 bps on a weekly basis
· Liquidity continues to be in a huge surplus of Rs 4.45 trillion(including CMB)
Bond markets are undaunted by supply and yields have trended down from highs despite supply announcements by the government. The government raised its borrowing for the full fiscal year from Rs 7.8 trillion to Rs 12 trillion. A stimulus package of Rs 20 trillion is being unveiled. Government is also buying short end bonds and issuing longer end bonds through switch auctions, Rs 300 billion auction announced for this week.
The new 10 year benchmark bond yield rose to over 5.85% levels on supply announcements but then came off 10bps from highs to close at 5.75% levels. 5 year OIS yield trended down close to 4% levels despite supply prospects.
The bond market is playing for rate cuts by the RBI and with high liquidity and ultra low rates, banks are buying into the longer end of the cure on any yield upticks. Short end yields are down to levels of 4.5% to 5% and markets are keen to flatten the curve given prospects of ultra low rates and very high liquidity.
Liquidity is going to rise sharply on government spending and RBI liquidity infusion and this will prompt the markets to play for any carry available at any segment of the curve.
The spread between the 5 year and 10 year bond is at levels of 68bps and this could faltten with 10 year yields coming off. The fiscal stimulus package of Rs 20 trillion is not seen as adding to bond supply given that the government is largely using banks liquidity and guarantees to fund the package.
The new benchmark 10-year bond, the 5.79% 2030 bond, yield rose marginally by 1 bps to 5.75% on a weekly basis. Old benchmark 6.45% 2029, yield increased by 11 bps to 6.08%. The benchmark 5-year bond, the 6.18% 2024 bond, yield rose by 6 bps to 5.08% while 7.17% 2028 bond yield went up by 9 bps to 6.15%. The 6.68% 2031 yield level gained 6 bps to 6.30% on a weekly basis. Long term paper, 7.16% 2050 yield level rose by 10 bps to 6.80% at the end of the week.
One-year OIS yield declined by 11 bps to 3.65% while the five-year OIS yield came down by 15 bps to 4.03% 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 4450 billion as of 15th May 2020. Liquidity was in a surplus of Rs 4839 billion as of 8th May 2020.