Government bond yields rose last week on the back of bond market doubts on downward direction of interest rates. The ten year benchmark bond, the 6.97% 2026 bond saw yields rise by 3bps week on week to close at levels of 6.79%. The bond had seen yields touch lows of 6.67% this month post RBI rate cut. The old ten year benchmark bond, the 7.59% 2026 bond saw yields rise by 4bps to close at 6.89% levels while the On the Run bonds, the 7.88% 2030 bond and the 8.13% 2045 bond saw yields rise by 1bps and 3bps respectively to close at levels of 7.03% and 7.21%.
Bond markets are slowly reconciling to the fact that RBI could stay put on rates for some time to come, given that March end inflation is expected at 5% and with the central bank showing comfort of 1.25% real rate of interest, repo rate at 6.25% is likely to hold for a while. RBI is more in a liquidity management mode, infusing liquidity through OMO’s to keep liquidity in neutral territory.
The impending Fed rate hike in December this year is also weighing on markets mind. The Fed is widely expected to raise rates in their December meet with many Fed officials calling for rate hikes. US ten year benchmark treasury yields closed last week at 1.85%, the highest level seen since May this year. Yields are up by 50bps from lows seen in July this year.
Given status quo on the repo rate with focus on liquidity, bond markets are choosing to stay cautious on longer term bonds. The yield curve is likely to steepen going forward as markets choose to book profits at the longer end of the yield curve.
OIS market saw one year OIS yields close up by 2bps and five year OIS yields close up by 3bps week on week. One year OIS yield closed at 6.36% while five year OIS yield closed at 6.35%. OIS yield curve will steepen in the coming weeks.
Corporate bond yields rose last week on the back of profit booking at lower levels of yields. Three-year benchmark AAA corporate bond yields rose by 4bps week on week to close at 7.31% levels. Credit spreads rose by 4 bps to close at 63bps levels. Five-year benchmark AAA bond yields rose by 4bps to close at 7.35% with spreads rising 6bps at 54bps levels. Ten-year benchmark AAA bond yields rose by 3bps to close at 7.51% levels with spreads down by 1bps at 60bps. Corporate bond yields will stay ranged at current 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) was in deficit of Rs 379 billion as of 28th October. The deficit was Rs 427 billion in the week previous to last. Government surplus was Rs 504 billion last week, up by 250 billion week on week. Liquidity will ease on government spending.