Government bond yield curve spreads and credit spreads fell last week as the market bought into higher levels of spreads. The 10 over 30 gsec spreads had risen on the back of bearishness in the bond market on Fed rate hike worries and on the back of RBI turning policy accommodation to neutral.
In our weekly fixed income note last week we had said that spreads are likely to fall as negatives that were factored in to higher spreads had started turning positive. Fed rate hikes did not worry bond markets as the Fed guided for gradual rate hikes. RBI turning policy neutral does not mean that RBI will hike rates as falling global oil prices will keep inflation under control. Crude oil prices have corrected by 10% on the back of rising supply with US shale oil producers raising output.
The market will await government borrowing program for the April-September 2017 period and RBI policy in the first week of April for fresh cues on bond yield direction. In the meanwhile, markets will continue to buy into attractive spreads given positive liquidity conditions.
The ten year benchmark bond, the 6.97% 2026 bond saw yields fall by 4bps 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 7bps to close at 6.98% levels while the 7.88% 2030 bond saw yields fall by 11bps to close at 7.35%. The 8.13% 2045 bond saw yields fall by 7bps to close at 7.56%. Bond yields will be ranged till RBI policy in April.
OIS market saw one year OIS yield fall by 2bps and five year OIS yield fall by 1bps week on week. One year OIS yield closed at 6.40% while five year OIS yield closed at 6.63%. OIS yields will stay ranged till RBI policy in April.
10 year AAA credit spreads closed sharply lower last week. 10 year benchmark AAA bond yields closed lower by 25bps at 7.73% levels with spreads down by 21bps at 79bps Benchmark 3 year AAA corporate bond yields closed flat week on week at 7.43% levels. Credit spreads rose by 8 bps to close at 75bps levels. 5 year benchmark AAA bond yields closed down by 15bps at 7.53% with spreads down by 5bps at 65ps levels. Market will look to buy into spreads at higher levels given strong system liquidity and stable repo rates
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 4070 billion as of 24th March 2017. The surplus was Rs 4129 billion in the week previous to last. There were no MSS bonds outstanding. Rise in currency in circulation on RBI easing limits on cash withdrawals and advance tax outflows brought down system liquidity.