10 year benchmark AAA bond yields closed lower by 8bps at 7.60% levels with spreads down by 2bps at 85bps levels against the new 10 year benchmark gsec, the 6.79% 2027 gsec. The spread was 71bps against the old 10 year gsec, the 6.97% 2026 gsec. As against the 10 year AAA spread, 3 year and 5 year AAA spreads were 60bps and 46bps respectively. Benchmark 3 year AAA corporate bond yields closed lower by 5bps at 7.33% levels. Credit spreads were flat at 60 bps levels. 5 year benchmark AAA bond yields closed lower by 6bps at 7.38% with spreads down by 2bps at 46bps levels. 3 year and 10 year spreads look more attractive than 5 year spreads.
FII’s have taken their corporate bond exposure to record levels of Rs 2.05 trillion given yield differentials with USD and Euro bonds. Appreciating INR is drawing in FII’s into INR Bonds and with credit spreads looking attractive; FII’s are likely to buy into the spreads.
Outlook for bond yields have changed considerably over the last couple of weeks given that inflation expectations have eased on lower GST rates. Government officials claim that CPI inflation will fall to 2% by the end of the calendar year. Normal monsoon forecasts, oil prices driven by supply concerns on US strategic oil sale and China rating downgrade have made outlook for commodity prices cheaper.
RBI will maintain rates in their June policy review and keep their neutral stance and also can lower their risk assessment of inflation. Expectations of RBI staying neutral on rates will drive down spreads across the yield curves.
Government bond yields came off last week. The new benchmark 10 year bond, the 6.79% 2027 bond saw yields close down 6bps week on week at levels of 6.64%. The old 10 year benchmark bond, the 6.97% 2026 bond, saw yields close down by 7bps at 6.78% levels while the on the run bonds, the 6.79% 2029 bond and the 7.06% 2026 bond saw yields drop by 5bps and 2bps respectively to close at levels of 6.83% and 7.35%. Gsec yields are likely to fall going into RBI policy in June on expectations of RBI maintaining rates status quo in their policy review in June.
OIS market saw one year yield fall by 4bps and five year OIS yield fall by 7bps last week. One year OIS yield closed at 6.45% while five year OIS yield closed at 6.57%. OIS curve spreads fell by 3bps. The spread can fall further on RBI policy expectations.
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 4174 billion as of 26th May 2017. The surplus was Rs 4288 billion in the week previous to last. Liquidity fell on rise in currency in circulation, which has risen by Rs 500 billion this month.