29 Dec 2019

RBI Twists Bond Markets Going into 2020

RBI announced Operation Twist for the second consecutive week for an amount of Rs 100 billion, buying the 10 year benchmark bond, the 6.45% 2029 bond, and selling short end bonds.

author dp
Team INRBonds
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RBI announced Operation Twist for the second consecutive week for an amount of Rs 100 billion,  buying the 10 year benchmark bond, the 6.45% 2029 bond, and selling short end bonds.  The 10 year government bond yield fell by 9bps week on week on the back of the RBI announcement.

The fall in the 10 year benchmark bond yield was not accompanied by sharp fall in yields across the curve. Five year bond yields rose on supply of bonds at the short end while long bond yields fell marginally. The RBI 10 year bond purchase will cause a kink in the curve, given that the bond markets are wary of higher inflation and higher government borrowing.

OIS yields rose on market worries while credit yields also rose.

RBI is auctioning Cash Management Bills to fill in government overdraft but at some point of time, the government has to sort out its persistent overdraft.

Going into 2020, the markets will be wary of a fiscally loose budget and continued downturn on the economy and yields across the curve except the 10 year bond, will be pressured.

The benchmark 10-year bond, the 6.45% 2029 bond, yields declined by 9 bps to 6.51% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield rose by 3 bps  6.46% while 6.68% 2031 bond yield decreased by 2 bps to 6.90%. Similarly, 7.17% 2028 bond yield came down by 4 bps to 6.85%.

One-year OIS yield rose by 3 bps to 5.31% while the five-year OIS yield increased by  5 bps to 5.50% on a weekly basis.

System liquidity as measured by bids for 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 2393.47 billion as of 27th December 2019. Liquidity was in a surplus of Rs 1779.9 billion as of 20th December 2019.