Bond yields are likely to come off on the back of bond positive economic data. The ten year benchmark bond, the 8.83% 2023 bond should see yields trend down from levels of 8.76%. The bond yield has fallen by 20bps since the beginning of 2014 as markets took out bets of rate hikes in the RBI January 2014 policy review and viewed the deferment of Rs 500 billion debt swap to the next fiscal positively.
On the domestic front, India’s IIP (Index of Industrial Production) growth for the month of November 2013 printed at a negative 2.1% against expectations of marginal growth. The manufacturing index printed at a negative 3.5%. The April-November 2013 period has see contraction in IIP and Manufacturing Index at levels of -0.2% and 0.6% respectively. Weak IIP portends GDP growth for fiscal 2013-14 coming in below 5% levels seen in 2012-13.
Inflation as measured by the CPI (Consumer Price Index) and WPI (Wholesale Price Index) is expected to come off for the month of December 2013 on the back of falling vegetable prices. CPI is expected to print at 9.92% from levels of 11.24% seen in November 2013 while WPI is expected to print at 7% from levels of 7.52%.
India’s trade deficit for the April-December 2013 period is down 25% year on year and the current account deficit (CAD) is expected to come off by 42% in fiscal 2013-14. Lower CAD is positive for the INR.
Passenger car sales in calendar year 2013 dropped 10%, the worst performance in a decade. Commercial vehicle sales have been falling continuously this fiscal with December 2013 showing a 26% decline. The auto industry in India is reflecting the tough economic conditions in the country.
RBI would have to keep rates on hold going forward and look to keep liquidity high in the system to encourage economic growth.
The US non farm payroll numbers disappointed markets that were expecting an addition of 197,000 jobs in the economy. The economy added 74,000 jobs against a revised 241,000 (203,000) jobs in November 2013. Unemployment rate fell to 6.7%, the lowest levels in over five years. However the unemployment rate fell on the back of more people opting out of the labor market than on the back of joining the workforce.
US ten year treasury yields fell 14bps to close at 2.86% levels post the jobs report. The Fed is expected to continue its USD 10 billion a meet taper of its asset purchase program. The Fed meets in January and then in March. Fed will also maintain rates at near zero percent levels to spur economic growth.
Gradual taper plus low Fed policy rates is positive for domestic bond markets.
Corporate bond market saw five and ten year benchmark AAA corporate bond yields dropping by 6 bps and 8 bps to close at levels of 9.60% and 9.55% respectively. Five and ten year credit spreads closed almost flat at 70 bps and 60 bps respectively. Corporate bond yields are likely to follow government bond yields in the coming weeks.
OIS (Overnight Index Swaps) market saw the curve trend down on the back of falling government bond yields. One and five year OIS yields fell by 5 bps and 8 bps respectively to close at levels of 8.38% and 8.33%. OIS yields are likely to shift down on the back of the drop in US treasury yields.
Liquidity tightened last week as banks covered product in the reporting week. The system borrowed Rs 490 billion in term repo auctions and Rs 355 billion in daily LAF (Liquidity Adjustment Facility). The total borrowing was Rs 100 billion higher last week compared to the week previous to last. Overnight rates trended towards MSF (Marginal Standing Facility) levels of 8.75% on the back of higher demand for funds but are likely to come off this week given term repo cut offs at 8.11% and 8.03% for 14 day and 7 day auctions respectively.