Bond Market Snapshot For The Week
· RBI cut the reverse repo rate by 25 bps to 3.75%
· Rs 500 billion targeted LTRO-2 to be conducted
· LCR relaxed from 100% to 80%
· 10 year benchmark yield declines by 14 bps on weekly basis
· 5-year OIS decreases by 46 bps
· Liquidity in a huge surplus of Rs 4 trillion(including CMB), rises on a weekly basis
RBI in an unscheduled policy announcement cut the reverse repo rate by 25bps, widening the LAF repo-reverse repo corridor to 65bps in order to discourage banks to park excess liquidity with the RBI. The central bank also guided for further rate cuts given that CPI inflation could plunge on the back of lack of demand. RBI also announced TLTROs to address liquidity issues for NBFCs and increased states WMA by 60%. There were some regulatory announcements as well. Read our note on the RBI policy announcements.
Bond and swap yields came off sharply on the policy announcements with the government bond yield curve steepening sharply. The 5*10 segment of the yield curve steepened by 32bps as markets bought into the shorter maturity bond on expectations of rate cuts, which will take down the reverse repo rate even further.
The market is worried about government finances as seen by the steepening of the yield curve. RBI mentioned that liquidity was in huge surplus on the back of government spending. Government had announced a relief package of Rs 1.7 trillion and is expected to announce more relief packages. GST collections will be almost nothing in April given lockdown. RBI is auctioning Rs 450 billion of T-bills weekly to plug the gap between government expenditure and revenue, which is widening everyday.
States too are in deep fiscal mess and require RBI overdraft support to ride out the economic slowdown. The government fiscal deficit will balloon this year and can spook markets.
Government bond yields will stay down till rate cuts and short end will be well supported on liquidity. Swap yields will also come off while credit spreads for the most liquid issuers will come off as markets search for yields.
The benchmark 10-year bond, the 6.45% 2029 bond, yield came down by 14 bps to 6.35% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield decreased by 46 bps to 5.48% while 7.17% 2028 bond yield declined by 29 bps to 6.50% and the 6.68% 2031 yield level decreased by 18 bps to 6.62% on a weekly basis. Also, 7.15% 2050 yield stood at 7.06% on 17th Apr.
One-year OIS yield came down by 35 bps to 3.90% while the five-year OIS yield declined by 46 bps to 4.33% 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 3941 billion as of 17th April 2020. Liquidity was in a surplus of Rs 3741 billion as of 9th April 2020.