Bond Market Snapshot For The Week
· RBI cut the policy repo rate by 75 bps to 4.40% , reverse repo cut by 100bps to 4%
· Rs 1 trillion targeted Long Term Repo Operation (LTRO) witnesses strong bids, Rs 250 billion allotted at 4.4% floating rate, linked to Repo Rate
· FY20 GDP will be much lower than 5%
· 10 benchmark yield came down by 12 bps on a weekly basis, however yields rose 14bps post policy on Friday
· CMB auctions announced for Rs 800 billion
· Liquidity continues to be in a huge surplus of Rs 2.94 trillion
10 year benchmark bond, the 6.45% 2029 bond, saw volatile trading last week, falling by 30bps then rising from lows by 14bps. Bond markets got a whiff of impending rate cuts and took down yields from highs and once RBI announced its rate cuts on Friday, the markets took profits. Read out note on RBI Policy for details.
Bond yields dropped despite the government announcing a Rs 1.7 trillion relief package for the hardest hit sections of the population , on Thursday the day before the policy announcement. Once the rate cuts and other measures were announced, the markets took profits in worry of the massive borrowing that the government will have to do to fund its fiscal bailout packages.
The SDL auction last week saw spreads rise by 100bps to 160bps signalling the markets discomfort on borrowing.
RBI is conducting Rs 800 billion of CMB auctions to fund the government’s overdraft with the RBI, indicating the extremely weak nature of government finances.
Government bond yields will see a steepening of the curve, as the government is expected to announce a much larger borrowing program than budgeted. Long end yields will rise on anticipated supply while short end will be bid on low rates and easy liquidity.
OIS yield curve too will steepen on low rates, high liquidity and supply worries,
Credit markets saw huge rise in spreads, as redemptions hit mutual funds and the markets turned illiquid. RBI’s first TLTRO auction for Rs 250 billion, designed to enable banks to buy corporate bonds, saw good demand, indicating that banks will step in to buy high quality bonds, which will lower spreads for at least the best past of the curve in terms of credit safety.
The benchmark 10-year bond, the 6.45% 2029 bond, yield came down by 12 bps to 6.14% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield declined by 41 bps to 5.59% while 7.17% 2028 bond yield decreased by 14 bps to 6.55% and the 6.68% 2031 yield level came down by 14 bp to 6.60% on a weekly basis.
One-year OIS yield declined by 33 bps to 4.29% while the five-year OIS yield decreased by 31 bps to 4.81% 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 and drawdown from Standing Facility (MSF or Marginal Standing Facility) was in surplus of Rs 2984 billion as of 27th March 2020. Liquidity was in a surplus of 3435 billion as of 20th March 2020.