The benchmark long bond, the 9.23% 2043 bond, saw yields fall by 18bps week on week to close at levels of 8.36%. The spread between the 9.23% 2043 bond and the ten year benchmark bond, the 8.40% 2024 bond, is at levels of 9bps. The 8.24% 2024 bond saw yields fall 11bps week on week to close at levels of 8.27%.
The spread between the 9.23% 2043 bond and the ten year benchmark bond was at levels of 43bps when the bond was first issued at a yield of 9.23% in December 2013. The spread has since come off by 34bps even as the yield curve has shifted down. The yield on the ten year benchmark bond has dropped by 53bps since December 2013 from levels of 8.80%. The 9.23% 2043 bond yield has dropped 86bps since the time it was issued. The 9.23% 2043 bond has outperformed the ten year benchmark bond by a whopping 33bps since December 2013.
In terms of returns, the 9.23% 2043 bond has outperformed the ten year bond by over 6% levels. The market by bringing down the spread between the ten year benchmark bond and the long bond to levels of just 9bps is indicating that it does not expect any negative surprise on interest rates going forward. In fact the market is betting on the whole yield curve shifting down and is willing to take extra risk on the long bond in order to capture the falling yield curve to the fullest extent.
The RBI has announced the auction of a new nineteen year maturity bond on the 7th of November 2014. The bond auction amount is Rs 3000 crores. The market will bid down the yields on the new bond given its preference for longer tenor bonds. The yield on the well traded 9.20% 2030 bond is at levels of 8.36%. The new bond maturing in 2033 will see cut off coming in lower than 8.36% and if there is a shift down in the curve, the cut off could well be in the 8.25% to 8.30% range.
OIS yield curve is inverted with five year OIS yield at levels of 7.49% and one year OIS yield at 8.11%. OIS market is betting on RBI lowering interest rates going forward but given that the OIS yield curve has been inverted for the past three years, it may not be the best indicator of RBI rate actions. However one year OIS yield rose by 8bps last week from levels of 8.03% to 8.11% while the five year OIS yield fell by 1bps to 7.49% levels. OIS yield curve has largely discounted RBI rate cut but the inversion of the curve suggests that rate cut is not in the cards in the immediate future.
Liquidity eased last week as funds came back into the system post the festive season. System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and 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 566 billion last week from Rs 965 billion seen in the week previous to last. Government is running cash surplus of around Rs 1100 billion and if it starts to spend, liquidity will ease significantly.