Bond Market Snapshot For The Week
· Market Borrowing of Government of India revised to Rs 12 trillion in the current fiscal year, Rs 6 trillion in H1FY21
· New 10 year Gsec cutoff yield comes in at 5.79%
· 5-year OIS yield fell by 4 bps
· CCIL SDL Index closes at 6.65%, declined by 17 bps on a weekly basis
· Liquidity continues to be in a huge surplus of Rs 4.99 trillion(including CMB)
The government, in a surprise announcement, increased the gross borrowing for this fiscal year to Rs 12 trillion from Rs 7.80 trillion budgeted and the 1st half borrowing was increased to Rs 6 trillion from Rs 4.88 trillion. The announcement came after market hours on Friday, after the new 10 year bond cut off came in at 5.79% and subsequently traded at levels of 5.74%. Bond yields fell last week on expectations of rate cut announcements by the RBI, as there were hopes of a new stimulus package to the economy by the government.
Bond yields will initially rise on the back of huge prospective supply, with states too borrowing on a weekly basis. The absorption capacity of the market is limited given that both insurance companies and provident funds will see a slowdown in collections on the back of job losses and wage cuts. Banks too are risk-averse given that low bond yields tend to rise when the economy stabilizes and investment books see huge depreciation in values.
FIIs are a good source of demand but with INR volatility and worries over the deficit, demand is still low from this front.
RBI will be expected to support the government borrowing program through secondary market bond purchases. There are some expectations that government may place bonds directly with RBI, but this remains to be seen as it requires some constitutional changes.
RBI may come in with announcements on support to the borrowing and also rate cuts and this will keep yields from rising too high and markets will buy into higher yields. However, every auction will be a test for market appetite and this will keep yields volatile.
OIS yield curve will steepen on rate cut expectations and bond yield volatility.
The benchmark 10-year bond, the 6.45% 2029 bond, yield came down by 14 bps to 5.97% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield decreased by 19 bps to 4.96% while 7.17% 2028 bond yield declined by 24 bps to 6.06%. The 6.68% 2031 yield level lost 23 bps to 6.47% on a weekly basis. Long term paper, 7.16% 2050 yield level came down by 6.70% at the end of the week. In bond auction, new 10-year gsec yield stood at 5.79%.
One-year OIS yield rose by 4 bps to 3.76% while the five-year OIS yield increased by 9 bps to 4.18% 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 4997 billion as of 8th May 2020. Liquidity was in a surplus of Rs 4309 billion as of 30th April 2020.