It’s a day traders market and not one for longer term position taking on direction of 10 year gsec yields. Square off intra day positions or refrain from any positions on the 10 year gsec. Buy into spreads especially 10 year credit spreads.
The benchmark 10 year bond, the 6.97% 2026 bond saw yields fall sharply by 14bps week on week to close at levels of 6.77%. Apart from the 10 year bond yield, all other bonds on the yield curve closed flat to higher while corporate bond yields and OIS yields closed higher. The sudden fall in 10 year gsec yield was attributed to lack of securities to borrow in the repo market by short sellers. Given that government borrowing is over for the year and next bond auction is only in April, short sellers of the 10 year gsec who have been carrying forward short positions have been borrowing the securities in the repo market.
Like in equities, bonds too require physical securities to be delivered against shorts if the short positions have to be carried over. Lack of securities to borrow means that the short seller defaults on the sale of the security, which incurs a penalty. The lack of 10 year gsec in the repo market is attributed to borrowers who were unwilling to give the 10 year gsec as security.
Given this scenario, traders will be unwilling to take overnight short positions on the 10 year gsec, though there could be selling by investors given that yields have fallen from highs. Traders will go to the IRF market to execute shorts, as the market is cash settled. April 6.97% 2026 gsec IRF contracts are trading at 6.90% levels, 13bps higher than the cash market yield of 6.77%.
The fall in 10 year gsec yields have made spreads attractive. 15 years and 30 years gsec yields are trading at spreads of 71bps and 82bps respectively over the 10 year gsec. Spreads have risen by 14bps and 17bps given the fall in 10 year gsec yields. 10 year AAA corporate bond spreads too have risen by 23bps to close at 103bps. Buying into the higher spreads offer both carry and a cushion against any strong negative reaction to Fed rate hikes.
The ten year benchmark bond, the 6.97% 2026 bond saw yields fall by 14bps week on week to close at levels of 6.77%. The old ten year benchmark bond, the 7.59% 2026 bond saw yields fall by 11bps to close at 6.96% levels while the 7.88% 2030 bond saw yields close flat at 7.48%. The 8.13% 2045 bond saw yields rise by 3bps to close at 7.59%. Yield curve should flatten as market buys into spreads.
OIS market saw one year OIS yield close up by 1bps and five year OIS yield close up by 3bps week on week. One year OIS yield closed at 6.44% while five year OIS yield closed at 6.74%. OIS yield curve will steepen as markets worry about Fed rate hikes.
10 year AAA Credit spreads closed sharply higher last week as 10 year corporate bond yields rose while 10 year gsec yields fell sharply. 10 year benchmark AAA bond yields closed higher by 5bps at 7.88% levels with spreads up by 23bps at 103bps Benchmark 3 year AAA corporate bond yields closed flat week on week at 7.28% levels. Credit spreads rose by 1 bps to close at 56bps levels. 5 year benchmark AAA bond yields closed flat at 7.53% with spreads up 1bps at 60bps levels. Market will buy into 10 year credit spreads at higher levels.
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 6027 billion as of 3rd March 2017. The surplus was Rs 5753 billion in the week previous to last. MSS bonds outstanding were Rs 1000 billion. Rise in currency in circulation on RBI easing limits on cash withdrawals will bring down system liquidity.