Bond yields fell sharply last week flattening the 10 over 30 segment of the government bond yield curve. The market is positioning for rate cuts by the RBI given the uncertainties to global economic growth post Brexit. Bond markets also took strong positive cues from the sharp fall in bond yields globally, with bond yields of many countries falling to record lows post Brexit.
The government bond market saw bonds at the long end of the yield curve falling sharply. The 7.88% 2030 bond saw yields fall by 10bps and the yield on the 8.13% 2045 bond fell by 12bps week on week. The ten year benchmark bond, the 7.59% 2026 bond saw yields fall by 5bps to close at 7.42% levels while the 8.27% 2020 bond saw yields fall by 7bps to close at 7.24% levels. The yield on the long bond, the 7.55% 2055 bond, closed down 10bps at 7.71% levels. The 10 over 30 segment of the yield curve flattened by 7bps to 29bps. Volumes in the market doubled last week on bullish undertones.
Bond markets have a lot of positives to look forward to and will continue its bull run going forward. The monsoons are on track and will lower expectations of food price inflation. The government is set to pass the GST bill in its monsoon session of the parliament this month. Liquidity is easy in the market and RBI is set to give a large dividend of over Rs 600 billion to the government in August, increasing system liquidity.
The market is also light on bonds given that supply for the first quarter of this fiscal has been negative with RBI buying Rs 800 billion of bonds and bonds worth over Rs 400 billion maturing. Global cues are highly positive with bond yields negative in many countries and at record lows in others. Fed is not expected to hike rates this year while ECB and BOJ are pumping in liquidity through asset purchases.
FII’s are expected to increase their limit utilization, which stands at 75% down 10% over the last one year. The INR will be one of the better performing currencies post Brexit given India’s relatively better macro economic fundamentals.
Bond yields are likely to trend down further and the 10 year benchmark government bond could touch 7% from current levels of 7.42% by September 2016.
OIS market saw one year OIS yields close down by 2bps and five year OIS yields close down by 6bps week on week. One year OIS yield closed at 6.55% while five year OIS yield closed at 6.62%. OIS yield curve will fall on rate cut expectations.
Benchmark AAA corporate bond yields closed flat to down last week. Three year bond yields closed flat at 7.93% levels with spreads up by 1bps at 67bps levels. Five year bond yields closed down by 6bps at 8% with spreads up by 1bps at 63bps levels while ten year bond yields closed down by 10bps at 8.16% with spreads down 5bps at 60bps levels. Corporate bond yields will fall on rate cut 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 deficit of Rs 133 billion as of 1st July. The deficit was Rs 281 billion in the week previous to last. Government surplus was Rs 147 billion last week, down by Rs 120 billion week on week. Liquidity eased on government spending and will ease further as government implements 7th Pay Commission Recommendations.