Bond Market Snapshot For The Week
· Retail food inflation stood at 9.28% in May 2020
· Industrial production contracted by 55.5% in April 2020
· New 10 year benchmark yield closed at 5.8%, rose by 2 bps on a weekly basis
· New 5 year benchmark bond cut off at 5.22%
· 5-year OIS yield came down by 10 bps
· CCIL SDL Index closed at 6.49%, unchanged from the previous week
· Liquidity continues to be in a surplus of Rs 2.30 trillion
The sharp contraction in IIP coupled with high food inflation will keep government bond yields ranged with a marginal upward bias. Disruptions in supply chains and labour shortages caused by huge reverse migration from cities have pushed up prices of essentials to the end consumer.
The consumer is also faced with job losses and pay cuts due to the lockdown effects and this will hurt capacity to purchase non essentials. Savings too get hurt when interest rates are at rock bottom.
RBI will have to tussle between ultra low rates that may hurt savings but help the market absorb huge government bond supply, which makes bond yields artificial and can cause huge losses for investors when yields rise.
Bond markets will be wary of higher food inflation given supply disruptions caused by monsoons. On the other hand, Fed’s forecast of 0% rates for at least 2 years brought down OIS yields sharply, indicating domestic markets are expecting rates to stay low for a while, despite high food inflation.
Domestic retail food inflation rose to 9.28% y-o-y in May 2020. Specifically, urban retail inflation came in at 8.36% while rural food inflation stood at 9.69% during the month. During May, vegetable prices moderated as compared to the previous month driven by easing of lockdown.
India’s industrial production contracted drastically by 55.5% in April on a yearly basis due to the economic lockdown caused by global pandemic. This is the largest contraction recorded in industrial output since April 1994. During the month, manufacturing, electricity, and mining sector output shrank by 64.3%, 22.6%, and 27.36% respectively.
The new benchmark 10-year bond, the 5.79% 2030 bond, yield rose by 2 bps to 5.8% on a weekly basis. Old benchmark 6.45% 2029, yield came down by 3 bps to 5.99%. The benchmark 5-year bond, the 6.18% 2024 bond, yield remained unchanged at 5.11% while 7.17% 2028 bond yield decreased by 4 bps to 6.05%. The 6.68% 2031 yield level rose marginally by 3 bps to 6.26% on a weekly basis. Long term paper 7.16% 2050 yield came in at 6.58%. New 5-year benchmark bond cut off yield stood at 5.22%
One-year OIS yield declined by 11 bps to 3.66% while the five-year OIS yield decreased by 10 bps to 4.14% 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 2302 billion as of 12th June 2020. Liquidity was in a surplus of Rs 2309 billion as of 5th June 2020.