The government took cognizance of rising bond yields and accordingly released a benign first half fiscal 2018-19 borrowing calendar. The 10 year benchmark government bond, the 7.17% 2028 bond, saw yields fall sharply by 15bps week on week to close at levels of 7.40%. Borrowing for the April-September 2018 period is around 47% of total borrowing for the fiscal year 2018-19 and spread out across maturity buckets from 1-4 years to 30 years and above.
Government is clearly keen on lowering its cost of borrowing and will do whatever it takes to keep down the costs. Markets will now watch RBI policy actions in its annual policy meet on the 4th and 5th of April 2018. RBI had guided for prolonged status quo on rates in its February 2018 meet and should reiterate its commitment on keeping the Repo Rate status quo at 6% for a longer period of time. Inflation guidance at 5.1% to 5.6% for the first half of fiscal 2018-19 and 4.5% to 4.6% for the second half should also stay unchanged. Any upward revisions in inflation range will be highly negative for the bond market.
RBI will highlight Fed rate hikes, global financial market volatility and rising oil prices as risk to stability in domestic markets and stability in inflation expectations. The central bank will also have to appease nervous markets on the stability of the banking system after the PNB scam, which has resulted in loss of faith by markets on banks, especially PSU banks. At the same time, RBI has to lend a hand to growth and also make sure that government borrowing goes through smoothly.
Given multiple agenda, RBI April 2018 policy will be a key indicator of where the markets want to take the 10 year government bond yield. Negative surprises will lead to sell off in bonds causing concerns on the government borrowing program while a calm policy will lead to range bound trading.
The old 10 year benchmark government bond, the 6.79% 2027 bond, saw yields fall by 30bps week on week to close at levels of 7.42% while the new benchmark 10 year bond, the 7.17% 2028 bond, saw yields fall by 15bps to close at 7.40%. The on the run bond, the 6.79% 2029 bond saw yields close 25bps down at 7.42% levels and the 6.68% 2031 bond saw yields close down by 21bps at 7.60%. The long bond, the 7.06% 2046 bond saw yields close down 22bps at levels of 7.73%. Bond yields will tend to stay ranged till RBI policy next week.
The OIS market saw 5 year OIS yields closing 8bps down week on week at levels of 6.76%. The one year OIS yield closed down by 4bps at 6.44%. OIS yields will fall on a benign RBI policy.
Corporate bonds saw 5 year AAA corporate bond yields close down by 13bps at levels of 7.83% and 10 year AAA corporate bond yields close down by 24bps at 8%. 5 year AAA spreads fell by 7bps at 38ps and 10 year AAA spreads fell by 8bps at 48 bps. Credit spreads will move on movements in government bond yields as corporate bond yields will stay sticky at higher 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 deficit of Rs 1914 billion as of 30th March 2018. The deficit was Rs 688 billion as of 23rd March. Liquidity will ease into April on government spending and system releasing financial year end hoards.