The ten year benchmark government bond, the 8.40% 2024 bond saw yields fall 5bps last week to close at 8.17% levels. The bond yield has come off by almost 50bps from highs of 8.65% seen in the beginning of August. Bond markets have turned bullish on expectations of a benign interest rate environment going forward.
The bond has been moving in an 8.15% to 8.22% range over the last couple of weeks as the market is digesting the sharp fall in the bond yield. The market mood is definitely bullish as seen in the auction cut off on the newly issued 8.15% 2026 bond. The twelve year bond cut off was lower than the yield on the ten year 8.40% 2024 bond. The new bond in the “When Issued” market traded as low as 8.12%. Watch our Two Minute Concept Video on When Issued Market.
The market is hesitant to take down yields on the 8.40% 2024 bond on worries of RBI killing market sentiment in its 2nd December 2014 policy review. However, going by the OIS (Overnight Index Swap) market, the worries seem to be misplaced. One year OIS yield fell 13bps last week to close at levels of 7.94%, the lowest level since July 2013. Five year OIS yield fell 14bps last week to close at 7.34% levels, the lowest level since July 2013. OIS yields trading below Repo Rate of 8% indicate that the swap market is expecting rate cuts by the RBI, sooner than later.
The bond market is likely to go bullish into the RBI policy as expectations are that even if RBI does not cut the Repo Rate, the tone will be dovish and will provide indications of rate cuts in 2015. The 8.40% 2024 bond could well trend down towards 8% levels in the coming week and then start trading below 8% post the 2nd December policy review.
Government bond yields fell last week on increased bullishness by the market on expectations of falling interest rates. Five year benchmark bond, the 7.28% 2019 bond saw yields fall by 9bps to close at 8.15% levels. The well traded 8.27% 2020 bond saw yields fall 9bps to close at 8.20% levels. The 8.60% 2028 bond saw yields fall 6bps to close at 8.24% levels. The long bond, the 9.23% 2043 bond saw yields fall 2bps to close at 8.29% levels. The yield curve steepened as markets took down yields at the short to mid segment of the curve on rate cut expectations.
System liquidity tightened last week on higher demand for funds from the banking system. 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 676 billion last week from Rs 454 billion seen in the week previous to last. Liquidity conditions are easy structurally and RBI will meet temporary liquidity deficit through term repo auctions.