The late Friday sell off in US and European equities and bonds will cast a shadow on the rally in domestic bonds, which has seen the new ten year bond, the 6.97% 2026 bond yield falling by 14bps since issuance on the 2nd of September. The S&P 500 fell by 2.5% and German Dax by 1% on Friday while US ten year treasury yields jumped by 8bps and ten year German Bund yields by 7bps. German Bund yields rose from negative territory to close at levels of 0.01% last week.
Hawkish comments by Fed committee member increased bets on September rate hikes and lack of further QE announcement by the ECB hurt markets. However, given that markets have been on a sustained rally since Brexit in June, with S&P 500 touching record highs and global bond yields falling to record lows, profit taking was due and the Fed gave the reason for the profit taking.
Domestic bond yields have seen a sustained fall since Brexit, with the ten year benchmark bond yield falling by close to 70bps. The ten year bond yield at 6.83% is at nine year lows. Bonds could see profit taking at lower levels of yields as markets go into the Fed meeting on the 20th and 21st of September.
Government bond yields closed down last week on the back of RBI buying Rs 100 billion of bonds through OMO purchase auction. The new benchmark ten year bond, the 6.97% 2026 bond saw yields close down by 14bps week on week to close at levels of 6.83%. The old benchmark ten year bond, the 7.59% 2026 bond saw yields falling by 6bps week on week to close at 7.06% levels while the 7.88% 2030 bond saw yields falling by 2bps to close at 7.14% levels. The 8.13% 2045 bond saw yields falling by 6bps to close at 8.20% levels. Bond yields will tend to rise from lows on Fed rate hike worries.
Credit spreads were mixed last week as government bond yields fell faster than corporate bond yields on RBI OMO purchase auction. Three year benchmark AAA credit spreads fell by 11bps to close at 45bps level while five and ten year benchmark AAA credit spreads rose by 4bps and 5bps respectively to close at levels of 42bp and 61bps. Credit spreads will stay ranged till FOMC rate decision in the third week of September.
OIS market saw one year and five year OIS yields close down by 5bps and 11bps respectively week on week. One year OIS yield closed at 6.51% while five year OIS yield closed at 6.38%. OIS yields will turn volatile on Fed rate hike expectations.
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 1040 billion as of 9th September. The surplus was Rs 805 billion in the week previous to last. Government surplus was zero last week as compared to Rs 32 billion in the week previous to last. Liquidity eased on the back of RBI forward purchase contracts maturing and will stay easy until advance tax outflows on the 15th of September.