RBI rejected all bids for the 6.57% 2033 bond in last week’s government bond auction and instead exercised the green shoe option on the 6.68% 2031 bond. The 6.57% 2033 bond auction for Rs 20 billion saw bids for Rs 43.43 billion while the 6.68% 2031 bond auction for Rs 80 billion saw bids for Rs 220 billion. RBI rejected bids for the 6.57% 2033 bond due to the market bidding negatively for the bond hoping for higher cut offs in terms of yields.
Bond market sentiment has turned negative post RBI October 2017 policy review where the central bank did not offer anything positive for markets to buy into. Given the weekly bond supply coupled with lack of any positive cues for the markets, bond market participants bid negatively for the 6.57% 2033 bond.
RBI rejecting all bids for the 6.57% 2033 bond is not a positive signal for the market in terms of the central bank signaling its discomfort with higher rates. The exercise of green shoe option of Rs 100 billion on the 6.68% 2031 bond suggests that RBI can go for the best bids and this can make the market even more circumspect in bidding for auctions.
US September 2017 jobs report reinforces the high probability of a Fed rate hike in December. US economy lost 33,000 jobs in September due to two massive hurricanes. Unemployment rate fell to 16 year lows of 4.2% while wage growth rose 2.9% year on year.
India lowered GST rates for 27 items on the back of a review by the GST council, however this will not have a major impact on the broad inflation forecasts by the RBI as these items do not really move the index.
Government bond yields rose last week. The benchmark 10 year bond, the 6.79% 2027 bond saw yields rise by 9bps week on week to close at levels of 6.75%. The on the run bond, the 6.79% 2029 bond saw yields close 11bps up at 7.04% levels and the 6.68% 2031 bond saw yields close up by 11 bps at 6.97%. The long bond, the 7.06% 2046 bond saw yields close up by 7bps at levels of 7.34%. Gsec yields will trend higher on negative cues from RBI policy.
The OIS market saw 5 year OIS yields closing 5bps higher week on week at levels of 6.32%. The one year OIS yield closed up by 3bps at 6.103OIS yields will rise on negative domestic and global cues.
Corporate bonds saw 5 and 10 year AAA corporate bond yields rising by 1bps and 7bps respectively. Credit spreads fell by 4bps and 1bps respectively. Credit spreads will stay sticky at higher levels as markets search for yields amidst high system liquidity.
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 Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) and MSS bond issuance was in surplus of Rs 3103 billion as of 6th October 2017. The surplus was Rs 2587 billion as of 29th September. Liquidity could tighten on festive demand for funds.