Indian benchmark ten year Government bond yields will trade in a 6.35% to 6.55% range until the budget on the 1st of February 2017.
Eurozone inflation for December 2016 printed at its highest level in three years at 1.1% while Eurozone PMI grew at its fastest pace in five and half years. Countries such as Germany and Spain saw inflation trending higher while business confidence grew overall in the Eurozone. ECB in its December 2016 policy meet extended its bond purchase program to December 2017 from March 2017 but pared the size of the program from Euro 80 billion a month to Euro 60 billion a month starting April 2017. Bond yields in the Eurozone have risen sharply from lows on the back of improved economic data.
US economy saw non farm payrolls rise by 156,000 in December 2016 taking total 2016 job additions to 2.2 million. December payrolls missed estimates by 20,000 but still the growth was solid. Unemployment rate rose from 4.6% to 4.7%. Wages increased at the fastest pace since 2008 showing a 2.9% annualized gain. The worry for the US Fed as per its December 2016 meeting minutes is the President Elect Trump administration focus on creation of jobs in the US, which could lead to sharp rise in wages in a tight labour market. Higher wage rise could lead to demand push inflation and would warrant a faster pace of rate hikes.
US ten year benchmark treasury yields closed at 2.43%, down by 1bps week on week but was up 7bps from levels seen before release of payroll data.
The tide definitely seems to be turning for bond yields globally with record low yields on the back of worries of deflation and recession giving way to higher yields.
Indian bond market too will be watching global economic data closely for any signs of sharp rise in global bond yields. RBI held rates status quo in its December 2016 policy review leading to a surge in the ten year gsec yield by 40bps to levels of 6.55% from 6.15%. The ten year gsec yield fell by 12bps last week as the government cut its borrowing program by Rs 180 billion for the January-March 2017 quarter. However, the market is still wary of global bond yield rise as seen by the devolvement in the auction of the 6.62% 2051 bond, as markets bid for higher cut off in terms of yields. RBI devolved 78% of the Rs 20 billion auction on to the PDs.
Government bond yields will trade in a 6.35% to 6.55% range until the budget on the 1st of February 2017.
The ten year benchmark bond, the 6.97% 2026 bond saw yields fall by 12bps week on week to close at levels of 6.39%. The old ten year benchmark bond, the 7.59% 2026 bond saw yields fall by 11bps to close at 6.63% levels while the 7.88% 2030 bond and the 8.13% 2045 bond saw yields fall by 12bps and 10bps respectively to close at levels of 6.86% and 7.06%. Bond yields will rise this week on the back of positive US job numbers.
OIS market saw one year OIS yields close down by 1bps and five year OIS yields close down by 3bps week on week. One year OIS yield closed at 6.17% while five year OIS yield closed at 6.23%. OIS yield curve will steepen as markets factor in faster pace of Fed rate hikes.
Credit spreads closed down last week. Three-year benchmark AAA corporate bond yields closed lower by 25bps week on week at 6.93% levels. Credit spreads fell by 26 bps to close at 41bps levels. Five-year benchmark AAA bond yields fell by 21bps to close at 7.12% with spreads down by 5bps at 58bps levels. Ten-year benchmark AAA bond yields fell by 16bps to close at 7.27% levels with spreads down by 4bps at 74bps. Credit spreads are likely to stay ranged until the budget.
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 7474 billion as of 6th January 2017. The surplus was Rs 6514 billion in the week previous to last. MSS bonds outstanding were Rs 5316 billion. Liquidity surged on higher deposits in the banking system due to demonetization.