Bond yields fell from highs last week as markets took profits from shorts. The market was in an oversold position with 10 year benchmark government bond yields rising by around 50bps since 23rd January 2018. Rise in government bond yields filtered into all other curves with money market securities yields, OIS yields and corporate bond yields rising sharply over the last one month.
The benchmark 10 year government bond, the 7.17% 2028 bond, saw yields fall by 7bps on a weekly basis to close at 7.67%. Five year OIS yields fell by 8bps to close at 7.82% while one year CD yields fell by 20bps to close at 7.40%. 3, 5 and 10 year benchmark AAA corporate bond yields fell by 10bps, 4bps and 3bps respectively to close at 7.85%, 8.14% and 8.40% respectively.
Bond markets are preferring to take profits from shorts at higher levels of yields given that the cost of shorting is high. Repo rate at 6% levels is expected to stay status quo for the next six months given RBI’s eye on nurturing economic growth. Liquidity is expected to stay comfortable with RBI injecting Rs 1 trillion of liquidity this month to meet any shortfalls on advance tax outflows, large government cash balances and year end system demand for funds. Fx reserves at around record high levels of USD 420 billion and RBI’s forward position of USD 29billion add comfort to both the INR and liquidity. Overnight money market rates are expected to stay at around 6% levels for a longer period of time unless there is either highly negative data prompting markets to factor in rate hikes or global risk aversion issues that could lead to capital outflows.
10 year US treasury yields closed by around 4bps higher on Friday the 9th of March on the back of strong US jobs data. US economy added 313,000 jobs in February beating market expectations while unemployment rate stayed at 4.1% and wage growth was muted. Wage growth was revised downwards for January 2018, comforting markets on inflation. The jobs data suggests that Fed would stick to path of gradual rate hikes though probability of 4 rate hikes this year has gone up.
Gradual pace of rate hikes by the Fed will allow the RBI to watch for signs of instability in markets rather than requiring to take any knee jerk reaction on rates. However, bond yields will rise initially on the back of the strong job numbers.
Bond markets will start positioning for April, which will see a flood of liquidity come back into markets. RBI is expected to keep rates status quo in April policy. Markets will buy into yields and spreads offered by money market securities and corporate bonds.
The old 10 year benchmark government bond, the 6.79% 2027 bond, saw yields fall by 6bps week on week to close at levels of 7.86% while the new benchmark 10 year bond, the 7.17% 2028 bond, saw yields fall by 7bps to close at 7.67%. The on the run bond, the 6.79% 2029 bond saw yields close 10bps down at 7.72% levels and the 6.68% 2031 bond saw yields close down by 7bps at 7.93%. The long bond, the 7.06% 2046 bond saw yields close down 2bps at levels of 7.93%. Bond yields will rise by 5bps to 7bps this week on the back of strong US jobs data.
The OIS market saw 5 year OIS yields closing 8bps lower week on week at levels of 6.82%. The one year OIS yield closed down by 4bps at 6.50%. OIS yields will rise on the back of strong US jobs data.
Corporate bonds saw 5 year AAA corporate bond yields close down by 4bps at levels of 8.14% and 10 year AAA corporate bond yields close down by 3bps at 8.40%. 5 year AAA spreads rose by 1bps at 58bps and 10 year AAA spreads rose by 3bps at 57 bps. Credit spreads should see buying in the weeks leading into April, given the attractive levels.
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) and MSS/CMB bond issuance was in surplus of Rs 906 billion as of 9th March 2018. The surplus was Rs 906 billion as of 1st March. Liquidity will get tight this week on advance tax outflows.