Government bond yields have been stuck in an extremely narrow range with the ten year benchmark bond, the 7.59% 2026 bond moving in a 5bps range between 7.42% to 7.47% since the beginning of April 2016. Bond markets are not finding clear reasons to drive down bond yields further at this point of time given that yields have dropped by 50 bps from highs seen in February 2016.
RBI is not expected to lower rates in its June policy review, as it will wait for monsoons to set in before taking any decision on rate cuts. Government is providing weekly supply of Rs 150 billion of bonds through auctions and though RBI has been buying bonds through OMOs and there have been bond redemptions of over Rs 400 billion, the markets are choosing to stay cautious at lower levels of yields.
The bond market is however confident on liquidity easing with the RBI pumping in liquidity through OMO’s and government spending to pump prime the economy. RBI has bought Rs 450 billion of bonds through OMOs April till date while government has spent Rs 2.5 trillion over the last two months.
RBI is moving towards bringing down system liquidity to neutral from current deficit levels of around Rs 1100 billion. RBI will be conducting more OMO purchase auctions and will also be a net buyer of USD and these two actions will infuse liquidity into the system.
Bond yields at the short end of the curve have fallen on the back of easing liquidity conditions even as bond yields at the longer ends have been range bound. The yield curve is steepening and will continue to steepen until the market establishes a clear direction for yields at the long end of the curve.
Government bond markets saw mixed yield movements last week as IIP numbers disappointed and CPI inflation rose. Read our economic data analysis for IIP and CPI data analysis. The benchmark ten year bond, the 7.59% 2026 bond saw yields closing up by 2bps at 7.45% levels. The 8.27% 2020 bond saw yields falling 2bps at 7.34% levels. The 7.88% 2030 bond saw yields falling by 1bps to close at 7.75% levels while the 8.13% 2045 bond saw yields closing flat at 7.85% levels. Government bond yields are likely to trade in a narrow range until RBI policy in June.
OIS market saw one year OIS yields falling by 1bps and five year OIS yields rising by 3bps week on week. One year OIS yield closed at 6.66% while five year OIS yield closed at 6.72%. OIS yield curve will steepen on easing liquidity conditions.
Benchmark AAA corporate bond yields closed mixed last week, Three year bond yields closed down 5bps at 7.88% levels with spreads down by 3bps at 51bps levels. Five year bond yields closed flat at 8.06% with spreads up by 3bps at 59bps levels while ten year bond yields also closed up 3bps at 8.20% with spreads up 1bps at 61bps levels. Corporate bond yield and spread curve will fall as market searches for yields amidst accommodative monetary policy.
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 1192 billion as of 6th May. The deficit was Rs 716 billion in the week previous to last. Government surplus was Rs 316 billion last week, up by Rs 316 billion week on week. Liquidity will ease as government spends and RBI pumps in liquidity through fx purchases and OMOs.