Bond Market Snapshot For The Week
· GDP growth rate came in at 3.1% during Q4FY20, 4.2% in FY20
· RBI conducted CMB auction of Rs 800 billion
· New 10 year benchmark yield closed at 5.78%, up by 4 bps on a weekly basis
· 5-year OIS yield rose by 8 bps
· CCIL SDL Index closed at 6.43%, down by 9 bps on a weekly basis
· Liquidity continues to be in a surplus of Rs 2.11 trillion(including CMB)
RBI delivered on rate cuts with the Repo rate at record low levels of 4% and Reverse Repo rate at 3.35%. The short end of the curve rates have collapsed with t-bills and even CD yields trading on par with reverse repo rates given excess system liquidity.
Last week saw the yield curve flatten at the longer end of the curve and this week t00 the trend continued with 10 year benchmark government bond yield rising while the 30 year bond yield fell. The markets are staring at huge supply of government paper and this could lead to fatigue in supply absorption leading to rise in yields.
RBI will now have to start to commence OMO bond purchases to ease market fatigue on constant supply. The central bank will also use the sharp fall in q4 fy 20 GDP growth to multi year lows and with nominal GDP at 7.2% for fy 20 against 8.5% budgeted and with q1 fy 21 GDP growth expected to contract on lockdown, there is a need to raise inflation expectations. Liquidity infusion through OMOs will serve RBI’s purpose of supporting bond yields at lower levels and also add liquidity into the system to push up inflation expectations.
The new benchmark 10-year bond, the 5.79% 2030 bond, yield increased by 4 bps to 5.78% on a weekly basis. Old benchmark 6.45% 2029, yield rose by 5 bps to 6.01%. The benchmark 5-year bond, the 6.18% 2024 bond, yield declined marginally by 1 bps to 5.09% while 7.17% 2028 bond yield increased by 5 bps to 6.07%. The 6.68% 2031 yield level rose marginally by 1 bps to 6.19% on a weekly basis. Long term paper, 7.16% 2050 yield level decreased by 7 bps to 6.58% from the previous week.
One-year OIS yield increased by 6 bps to 3.76% while the five-year OIS yield rose by 8 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 2118 billion as of 29th May 2020. Liquidity was in a surplus of Rs 3761 billion as of 22nd May 2020.