Bond Market Snapshot For The Week
· New 10 year benchmark yield closed at 5.78%, unchanged from the previous week
· 5-year OIS yield rose by 4 bps
· CCIL SDL Index closed at 6.49%, down by 6 bps on a weekly basis
· Liquidity continues to be in a surplus of Rs 2.30 trillion(including CMB)
A steepening UST yield curve drove risk appetite higher in global markets, pulling up risk assets. Read our report on global currencies and bonds for details. RBI was seen buying USD to prevent a sharp appreciation of the INR. These factors signal that the worst could be over for markets post the sharp fall due to Covid 19.
US job data showed unexpected gains in May and this could trigger a wave of risk assets purchases even as safe have bonds get sold. If this trend continues, bond markets may hesitate to take down government bond yields even if RBI maintains an accommodative stance.
RBI has signaled that it has room to cut rates further from record lows given the expectation of sharp deceleration in economic growth due to the lockdown. However, RBI believes that inflation could be sticky due to the disruption in supply chains that has made essentials costlier for the consumer. On one hand, there are deep production cuts and on the other hand the prices of goods and services may see increase due to disruptions caused by lockdown.
Inflation expectations could further rise on the back of government procuring output from farmers at over 50% of production cost. The MSP is being fixed at higher levels in order to provide good income to farmers given bumper crops and this would feed into food inflation.
The second factor for higher inflation expectations is the labour shortages expected in cities and towns given that migrant labourers have returned to their villages in vast numbers. Already, the effect of lack of labour is seen invarious businesses with output getting disrupted and hiring of local labour has become expensive. Local labour force come with various expectations that are much higher than what migrants expect and this leads to lower productivity and higher wages, hurting businesses across sectors.
RBI may have to do a delicate balancing act between being ultra accommodative and at the same time keeping a lid on inflation expectations.
Bond markets are likely to trade flattish with a mild upward bias in yields given that global risk aversion is easing on lockdown lifting. Equities have rallied and credit spreads have fallen indicating higher risk appetite.
The new benchmark 10-year bond, the 5.79% 2030 bond, yield remained unchanged at 5.78% on a weekly basis. Old benchmark 6.45% 2029, yield rose marginally by 1 bps to 6.02%. The benchmark 5-year bond, the 6.18% 2024 bond, yield rose by 2 bps to 5.11% while 7.17% 2028 bond yield increased by 2 bps to 6.09%. The 6.68% 2031 yield level rose marginally by 4 bps to 6.23% on a weekly basis.
One-year OIS yield increased by 1 bps to 3.77% while the five-year OIS yield rose by 4 bps to 4.24% 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 2309 billion as of 5th June 2020. Liquidity was in a surplus of Rs 2118 billion as of 29th May 2020.