The 10 year benchmark government bond, the 6.79% 2027 bond, saw yields rise by 9bps week on week to close at over one year high levels of 7.04%. The bond saw volatility on Friday with yields falling by 10bps and then rising back to where they came from post Moody’s rating upgrade. The bond saw a cut off yield of 6.97% in Friday’s bond auction and then closed at 7.05% indicating extreme nervousness in the market.
The market is worried about bond supply on the back of government looking to pump prime economic growth. Other reasons for market nervousness include markets taking out rate cut expectations, Fed rate hike expectations, rising core inflation and rising global oil prices. “Read our note on 5 Reasons for Rise in 10 year Gsec Yield.
RBI cancelled an OMO bond sale auction scheduled for the 23rd of November on the back of market nervousness. However, markets will stay nervous even if yields drop from highs on OMO cancellation. Worries will remain until markets settle down on the fact that there is no threat to either inflation rising too fast or RBI changing its neutral stance to a tight stance. Read our note on “5 Reasons Why the RBI Will not Hike Rates”.
Moody’s upgrade of India’s rating is sentiment positive but markets have already factored in all strong macro economic data and reforms of the government. Read our note on “Nothing to Get Excited on India’s Rating Upgrade”. The 10yr bond yield down and up movement post rating upgrade indicates that the market took out shorts on the news and reinstated the shorts at lower levels of yields.
Bond yields will stay volatile as government and RBI tries to calm down nervous bond markets.
Government bond yields rose last week on supply and inflation worries. The benchmark 10 year bond, the 6.79% 2027 bond saw yields rise by 9bps week on week to close at levels of 7.04%. The on the run bond, the 6.79% 2029 bond saw yields close 3bps up at 7.15% levels and the 6.68% 2031 bond saw yields close up by 7 bps at 7.13%. The long bond, the 7.06% 2046 bond saw yields close up by 5bps at levels of 7.40%. Gsec yields will by volatile on the back of Government and RBI trying to calm nervous markets.
The OIS market saw 5 year OIS yields closing 9bps higher week on week at levels of 6.54%. The one year OIS yield closed up by 6bps at 6.29%. OIS yield curve will steepen on the back of market worries on supply and inflation.
Corporate bonds saw 5 and 10 year AAA corporate bond yields rise by 14bps and 8bps respectively to close at levels of 7.42% and 7.74%. 5 year credit spreads rose by 4bps to close at 40bps while 10 year spreads fell by 1bps to 58bps. Corporate bond yields will follow government bond yield direction though pace of rise will be lower leading to falling credit spreads. Liquidity will keep credit spreads down as markets search for yields.
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 1574 billion as of 17th November 2017. The surplus was Rs 1739 billion as of 10th November. Liquidity will stay comfortable on government spending and RBI fx purchases.