Bond Market Snapshot For The Week
· Bond switches auction of Es 370 billion scheduled on 24th of February
· Rs 250 billion of Long Term Repo was auctioned
· 5 year OIS yields rose by 9 bps to 5.26%
· Liquidity continues to be in a huge surplus of Rs 4.17 trillion
The RBI announced a Bond Switch or Conversion auction for Rs 370 billions scheduled on the 24th of February. The government will buy bonds maturing in 2020, 2021 and 2024 and sell bond maturing in 2033 for Rs 120 billion and bond maturing in 2024 for Rs 250 billion. The bond switch auction helps the government ease the stress of bond repayment in the short term. Read our note on Bond Switches for details.
Bond switches are nothing but roll over of debt, as debt maturing in the near term is postponed through issuance of longer term bonds. This would also mean that the government is easing the load on tax payers today and making the tax payers of tomorrow bear the load. Bond switches help the government when its finances are weak and it requires funds for its other spending.
The bond market in good times may not worry too much on the switches as there is demand for longer tenor bonds on the back of easy monetary and inflation conditions but when markets turn bad, bond switches are seen as adding supply of longer tenor bonds and this will take up yields in the market.
Bond market reaction to the B0nd Switch auction was marginally negative and yields rose on worries of higher supply at the longer end of the curve. The government borrowing for fiscal 2020-21 will largely be at the longer end of the curve and the huge supply of Rs 7.8 trillion can hurt market sentiments. Bond markets also took this opportunity to book profits as yields had fallen by 20bps post the RBI policy in the 1st week of this month.
The LTRO (Long Term Repo Operations) auction of Rs 250 billion for 3 years maturity Repo saw a huge demand with total bids at Rs 1.94 trillion. The market bid for cheap long term funds as there is enough arbitrage available between credits and repo rate.
The benchmark 10-year bond, the 6.45% 2029 bond, yield rose by 5 bps to 6.42% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield increased by 4 bps to 5.98% while 7.17% 2028 bond yield went up by 5 bps to 6.58% while the 6.68% 2031 yield level rose by 1 bps to 6.68% on a weekly basis.
One-year OIS yield rose by 3 bps to 5.13% while the five-year OIS yield increased by 9 bps to 5.26% 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 4174 billion as of 20th February 2020. Liquidity was in a surplus of Rs 4518 billion as of 14th February 2020.