Government bond yields rose last week as the Fed hiked rates by 25bps in its meet held on the 13th and 14th of December 2016. Gsecs yields rose on the back of rising US treasury yields and strengthening USD. Ten year benchmark US treasury yields rose by 16bps week on week to close at over two year highs at levels of 2.60% while the USD strengthened by 1.34% against major currencies and by 0.52% against the INR. The Fed guided for more rate hikes in 2017, leading to the rise in US treasury yields and strengthening of the USD.
The ten year benchmark bond, the 6.97% 2026 bond saw yields rise by 6bps week on week to close at levels of 6.50%. The old ten year benchmark bond, the 7.59% 2026 bond saw yields rise by 8bps to close at 6.66% levels while the 7.88% 2030 bond and the 8.13% 2045 bond saw yields rise by 13bps and 23bps respectively to close at levels of 6.93% and 7.11%. The widening spread between the ten year and longer bond yields indicate bearish market trends and yields could rise further from current levels.
RBI started the sell off in gsecs by maintaining rates status quo in its policy meet this month and the Fed has contributed to the bearish trend. Ten year gsec yields have risen by 43 bps from pre policy levels on the 7th of December 2016. Bond markets have to wait till the Union Budget in the beginning of February 2017 for direction and hence the sell off in bonds as there are no immediate positive triggers for the market.
OIS market saw one year OIS yields close up by 2bps and five year OIS yields close up by 6bps week on week. One year OIS yield closed at 6.22% while five year OIS yield closed at 6.30%. OIS yield curve will steepen as long end gsec yields rise on the back of Fed rate hikes.
Credit spreads closed mixed last week. Three-year benchmark AAA corporate bond yields closed flat week on week at 7.03% levels. Credit spreads fell by 7 bps to close at 64bps levels. Five-year benchmark AAA bond yields rose by 10bps to close at 7.28% with spreads down by 6bps at 62bps levels. Ten-year benchmark AAA bond yields rose by 13bps to close at 7.46% levels with spreads up by 6bps at 85bps. Credit spreads are likely to go down, as corporate bonds turn sticky at higher levels of 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) was in surplus of Rs 6452 billion as of 16th December. The surplus was Rs 5224 billion in the week previous to last. MSS bonds outstanding was Rs 4649 billion. Government surplus was Rs 78 billion last week.