Fed chair Janet Yellen, in her Jackson Hold speech said that the case for rate hikes has strengthened in recent months. She emphasized that labor markets are strong enough to push up inflation to Fed’s target of 2% over the next couple of years and Fed Fund rates should reflect stability in employment and inflation.
US ten year treasury yields rose 7bps and the USD strengthened as markets started to factor in a Fed rate hike in September. The US jobs report on 2nd September will be watched closely for affirmation of a September rate hike.
Indian bond markets will start to feel the Fed rate hike expectations this week as markets await the 2nd September jobs report. The bond yield will be volatile as players shift positions on higher expectations of a Fed September rate hike. Expectations were just 10% a couple of weeks ago, now it has gone up to over 30%.
The benchmark ten year bond, the 7.59% 2026 bond saw yields rising by 3bps week on week to close at 7.13% levels while the 7.88% 2030 bond saw yields staying flat to close at 7.16% levels. The 8.13% 2045 bond saw yields rising by 1bps to close at 8.28% levels. Bond yields will rise on the back of Fed rate hike expectations.
Credit spreads fell last week as markets were enthused by RBI moves to deepen the corporate bond market. Three, five and ten year benchmark AAA credit spreads fell by 3bps, 8bps and 3bps respectively last week to close at levels of 50bps, 36bps and 44bps. Credit spreads will look to trend down on market search for yields
OIS market saw one year OIS yields close up by 2bps and five year OIS yields close flat week on week. One year OIS yield closed at 6.57% while five year OIS yield closed at 6.50%. OIS yields will rise 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 356 billion as of 26th of August. The surplus was Rs 553 billion in the week previous to last. Government surplus was Rs 77 billion last week. Liquidity will stay comfortable on government spending.