Bond Market Snapshot For The Week
· RBI announces Operation Twist
· 10-year benchmark yield declines by 18 bps on a weekly basis
· 5-year OIS decreases by 13 bps
· Liquidity continues to be in a huge surplus of Rs 4 trillion(including CMB)
RBI announced an operation twist, selling 2020-21 maturity bonds and buying bonds maturing in 2026,28,29,30. The announcement sent bond yields tumbling with the 10 year benchmark bond yield falling by 35bps to lows of 6% before rising by 17bps to close the week at 6.17% levels. RBI believes that bond yields at the medium to longer end of the yield curve should be lower and is intervening in the market to bring down yields.
The bond market, however, is inundated with supply and banks have seen many times that buying into low yields cause high mark to market pressures later down the line, when yields rise. Banks are happy to buy into the shorter end of the yield curve and use the longer end to trade.
The fact that RBI is flexing its muscles to keep yields down will prevent the market from taking up yields. The tendency of the market will be to bid at higher yields in the auction with an intention to sell it down before the next auction.
Banks are the only large buyers of government bonds at this point of time as insurers have seen dip in premium collection due to the Covid 19 issue and provident funds are seeing lower flows and even withdrawals given government relaxation on withdrawals. FIIs are absent given volatile INR. RBI presence is required to absorb government borrowing at this juncture.
OIS yields fell on the back of operation twist and will stay down given high liquidity and rate cut expectations.
The benchmark 10-year bond, the 6.45% 2029 bond, yield came down by 18 bps to 6.17% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield decreased by 29 bps to 5.19% while 7.17% 2028 bond yield declined by 18 bps to 6.32%. The 6.68% 2031 yield level decreased by 15 bps to 6.47% on a weekly basis. Long term paper, 7.19% 2060 yield level stood at 6.93% at the end of the week.
One-year OIS yield came down by 12 bps to 3.78% while the five-year OIS yield declined by 13 bps to 4.20% 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 4035 billion as of 24th April 2020. Liquidity was in a surplus of Rs 3941 billion as of 17th April 2020.