Bond Market Snapshot For The Week
· SDL auction witnesses spike in cut-off yield
· RBI continues to conduct Targeted LTRO(TLTRO)
· 40 year bond cut off at 7.19% in the auction, 2 year bond cut off at 5.09% indicating a steep yield curve
· The 10-year benchmark yield rose by 18 bps on a weekly basis
· Liquidity in surplus of Rs 3.74 trillion(including CMB), rises on a weekly basis
The first government bond auction for the fiscal year 2020-21 held last week saw the auction go through without the need for RBI to devolve the auction on underwriters. The market was worried that high levels of bids in terms of yields would force the RBI to either devolve the auction on primary dealers who underwrite the auctions or reject bids altogether. The new issue of 40 year bond for Rs 60 billion saw the RBI accepting bids for only Rs 40 billion with cut off yield at 7.19%. RBI exercised greenshoe option of Rs 20 billion in the 2 year bond at a cut off yield of 5.09%. The 10 year bond saw cut off yield at 6.53% for Rs 100 billion.
The yield curve is steep with the 2*10 spread at 144 bps, indicating that markets believe that low rates and high liquidity will prevail while supply will keep yields at the longer end of the curve pressured. 10 year bond yield rose by 18bps in run up to the auction and has risen by 50bps since RBI cut rates by 75bps.
RBI will look to try and keep long end yields stable by buying bonds through OMOs or conducting operation twists, where it sells short end bonds and buys long end bonds.
The SDL auction saw cut off spreads at over 130bps indicating markets lack of appetite at lower yields.
Government bond yields would stabilize at higher levels on RBI intervention expectations but every auction will be a challenge to keep yields on hold. The government is expected to announce another package for SMEs for Rs 1 trillion, which takes up the bailout to Rs 2.7 trillion and this has to be funded through borrowings.
The benchmark 10-year bond, the 6.45% 2029 bond, yield rose by 18 bps to 6.49% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield increased by 16 bps to 5.94% while 7.17% 2028 bond yield rose by 18 bps to 6.79% and the 6.68% 2031 yield level increased by 10 bps to 6.80% on a weekly basis.
One-year OIS yield came down by 4 bps to 4.25% while the five-year OIS yield rose marginally by 1 bps to 4.79% 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 3741 billion as of 9th April 2020. Liquidity was in a surplus of Rs 1578 billion as of 3rd April 2020.