10 year benchmark bond, the 6.97% 2026 bond should see yields trending up by 18bps to 7% levels this week. The distinct lack of appetite for the 6.97% 2026 bond in the government bond auction last week indicates that the market is uncomfortable with the bond at yields of around 6.80%. RBI has also announced auctions of MSS Tbills for Rs 1000 billion staring 17th April, which will place further pressure on bond yields as liquidity gets sucked out of the system.
The Rs 80 billion of 6.97% 2026 bond auctioned last week as part of the Rs 180 billion government bond auction saw the RBI devolving 41% of the auction on to the Primary Dealers at cut off yields of 6.808%. The bond received just Rs 109.56 billion of bids. The bid to cover ratio of 1.36x was at multi year lows. The bond market is clearly disinterested in the 10 year bond at levels of 6.80%. The rest of the bonds auctioned, the 6.84% 2022 bond, the 7.73% 2034 bond and the 7.06% 2046 bond saw bid to cover ratios of over 2x.
RBI will be auctioning Tbills with maturity in the range of 312 days to 329 days under the MSS to suck out liquidity infused through its fx purchases. Auction size will be Rs 250 billion each, with four auctions spread over from 17th April to 8th May. The auctions are aimed to suck out durable system liquidity.
The ten year benchmark bond, the 6.97% 2026 bond saw yields rise by 1bps week on week to close at levels of 6.82%. The old ten year benchmark bond, the 7.59% 2026 bond saw yields fall by 14bps to close at 6.91% levels while the 7.88% 2030 bond saw yields fall by 14bps to close at 7.29%. The 8.13% 2045 bond saw yields fall by 6bps to close at 7.52%. Bond yields will rise on worries on appetite for bonds in the bond auctions.
OIS market saw one year OIS yield and five year OIS yield fall by 3bps and 7bps respectively last week. One year OIS yield closed at 6.43% while five year OIS yield closed at 6.68%. OIS curve could flatten on RBI liquidity measures.
10 year benchmark AAA bond yields closed lower by 7bps at 7.71% levels with spreads down by 8bps at 77bps levels. Benchmark 3 year AAA corporate bond yields closed 10bps down week on week at 7.33% levels. Credit spreads fell by 2 bps to close at 57 bps levels. 5 year benchmark AAA bond yields closed down by 12bps at 7.46% with spreads down by 2bps at 57ps levels. Credit spreads could rise on RBI MSS auctions but will then fall again 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 Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) and MSS bond issuance was in surplus of Rs 4234 billion as of 14th April 2017. The surplus was Rs 4291 billion in the week previous to last. There were no MSS bonds outstanding. Liquidity will fall as money goes out as currency in circulation and RBI auction of MSS Tbills.