Indian Government Bond yields closed down week on week despite a global sell off in bond markets on the back of a Trump victory. Prime Minister Modi’s decision to demonetize Rs 500 and Rs 1000 notes helped gsec yields to come off. Demonetising currency notes brings in deposits to the banking system and also helps lower inflation expectations, both of which are positive for bond yields.
The ten year benchmark bond, the 6.97% 2026 bond saw yields fall by 11bps week on week to close at levels of 6.72%. The old ten year benchmark bond, the 7.59% 2026 bond saw yields fall by 10bps to close at 6.83% levels while the On the Run bonds, the 7.88% 2030 bond and the 8.13% 2045 bond saw yields fall by 7bps and 12bps respectively to close at levels of 7% and 7.14%. The three and five year gsec yields fell by 16bps and 15bps respectively, steepening the yield curve on expectations of rate cuts and surge in liquidity.
Global bond yields saw a sell off post Trump victory on the back of heightened inflation expectations. Trump has said that he will pump prime the economy through spending on infrastructure. Ten year US treasury yields rose by 30bps while ten year German Bund yields rose by 20bps post Trump victory. The sharp rise in global bond yields filtered in gsec yields that came off by around 10bps from lows seen last week.
Going forward, the sharp spike in global bond yields will not stop a rally in gsec yields as the demonetization effect is stronger than global bond yield movements. Global bond yields had fallen to ultra low levels on the back of uncertainty on US elections and are normalizing. The Fed is on course to raise rates in December and will guide for muted rate hikes in 2017.
OIS market saw one year OIS yields close down by 15bps and five year OIS yields close down by 8bps week on week. One year OIS yield closed at 6.19% while five year OIS yield closed at 6.27%. OIS yield curve will steepen in the coming weeks as markets factor in easy liquidity.
Credit spreads closed mixed last week. Three-year benchmark AAA corporate bond yields fell by 5bps week on week to close at 7.23% levels. Credit spreads rose by 12 bps to close at 72bps levels. Five-year benchmark AAA bond yields fell by 12bps to close at 7.26% with spreads rising 3bps at 58bps levels. Ten-year benchmark AAA bond yields fell by 15bps to close at 7.43% levels with spreads down by 3bps at 60bps. Credit spreads are likely to go down on expectations of rate cut and surge in system liquidity,
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 deficit of Rs 380 billion as of 11th November. The deficit was Rs 259 billion in the week previous to last. Government surplus was Rs 438 billion last week, down by 130 billion week on week. Liquidity will ease on demonetization.