25 May 2020

Yield Curve Compresses on Rate Cuts

The longer end of the curve compressed sharply with respect to the new 10 year benchmark bond, the 5.79% 2030 bond as markets played for flattening of the curve

author dp
Team INRBonds
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Bond Market Snapshot For The Week

·         RBI cut the repo rate by 40 bps to 4.00%

·         Moratorium Period extended by 3 months

·         New 10 year benchmark yield stood at 5.74%, came down by 1 bps on a weekly basis

·         5-year OIS yield rose by 9 bps

·         CCIL SDL Index closes at 6.52%, increased by 3 bps on a weekly basis

·         Liquidity continues to be in a huge surplus of Rs 3.76 trillion(including CMB)

 

The longer end of the curve compressed sharply with respect to the new 10 year benchmark bond, the 5.79% 2030 bond as markets played for flattening of the curve. RBI cut rates in an unscheduled policy move on the 22nd of May with guidance of more easing if required.

Bond markets have largely steepened the curves on supply worries but with the comfort of RBI liquidity and yield support, markets are now tending to start to flatten the curve, given the attractive spreads at the longer end.

The flattening is seen as continuing given that the economy will take a while to recover from lockdowns.

The new benchmark 10-year bond, the 5.79% 2030 bond, yield declined marginally by 1 bps to 5.74% on a weekly basis. Old benchmark 6.45% 2029, yield decreased by 12 bps to 5.96%. The benchmark 5-year bond, the 6.18% 2024 bond, yield declined by 10 bps to 5.10% while 7.17% 2028 bond yield came down by 13 bps to 6.02%. The 6.68% 2031 yield level declined by 12 bps to 6.18% on a weekly basis. Long term paper, 7.16%  2050 yield level decreased by 15 bps to 6.65% at the end of the week.

One-year OIS yield increased by 5 bps to 3.70% while the five-year OIS yield rose by 9 bps to 4.12% 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 3761 billion as of 22nd May 2020. Liquidity was in a surplus ofRs 4450 billion as of 15th May 2020.