Bond Market Snapshot For The Week
· 10 year benchmark Gsec yield fell by 19bps last week
· Rs 250 billion of Long Term Repo (3 years) was auctioned
· 5 year OIS yields declined by 25 bps to 4.77%
· Liquidity continues to be in a huge surplus of Rs 4.93 trillion
The impact of corona virus on the economy will prompt RBI to cut rates by at least 50bps to record lows. Bond markets are factoring in steep rate cuts with the 5 year OIS yield trading at 4.77%. The government bond yield curve steepened with the 5*10 spread steepening from 18bps in January to 60bps at present.
RBI is also injecting liquidity into the system through LTROs, with Rs 750 billion already being auctioned and Rs 250bps auction scheduled for this week on the 9th of March.
Oil prices fell 10% last week on demand worries and are trading at almost 3 years lows. Oil price fall will help lower inflation expectations but will also worsen the fiscal situation of the government given the fact that tax revenues from excise duties on oil will come off sharply.
US 10 year treasury yields fell to record lows of 0.72% on the back of risk aversion on corona virus. INR too fell to record lows of Rs 74 to the USD on the back of both corona virus and Yes Bank debacle, that saw the 4th largest private sector bank, being placed under a restructuring scheme by the RBI.
Bond markets will have to weigh in rate cuts, liquidity, higher government borrowing and fall in INR for directional positioning. Yield curves will steepen while credit spreads will rise sharply for non PSU credits.
The benchmark 10-year bond, the 6.45% 2029 bond, yield came down by 19 bps to 6.18% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield decreased by 25 bps to 5.62% while 7.17% 2028 bond yield declined by 11 bps to 6.42% and the 6.68% 2031 yield level came down by 13 bps to 6.54% on a weekly basis.
One-year OIS yield declined by 32 bps to 4.65% while the five-year OIS yield decreased by 25 bps to 4.77% 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 4930 billion as of 6th March 2020. Liquidity was in a surplus of Rs 4382 billion as of 28th February 2020.