The positive sentiment in bond markets that has taken down bond yields by 30bps since the beginning of calendar year 2014 is set to continue on the back of RBI OMO bond purchase auctions and the government looking to lower full year budgeted borrowing by Rs 150 billion. The ten year benchmark bond the 8.83% 2023 bond saw yields close at 8.63% last week, down by 13bps week on week. The bond yield is likely to trend down this week on positive sentiments.
The Finance Minister sent out positive news on the fiscal deficit that is expected to print at 4.65% of GDP against budget estimates of 4.8% of GDP. The government is lowering plan expenditure by 20% to adhere to fiscal deficit targets in the face of tax revenue growth that is trending below budgeted growth levels. Direct taxes have grown by 12.5% in the April-December 2013 period against growth targets of 17.5% while indirect taxes have grown by 5% in the April-November 2013 period against growth estimates of 17.5%.
The government is running surplus cash at present as it has stopped spending and that cash is parked with the RBI. Government surplus estimates would be around Rs 600 billion leading to liquidity becoming tight in the system. The government had deferred a bond auction of Rs 150 billion that was scheduled for the 17th of January and has indicated that it will cancel the borrowing given the surplus that it is running.
The RBI has announced an OMO (Open Market Operations) bond purchase auction for Rs 100 billion on the 22nd of January. RBI will buy liquid bonds such as the 8.07% 2017 bond, the 7.28% 2019 bond, the 7.16% 2023 bond and the 8.28% 2027 bond in the auction. RBI could announce more OMO auctions if government stops spending and March advance tax payments draws close leading to liquidity become extremely tight in the system.
Liquidity tightened last week on fresh demand for funds at the start of the reporting week. RBI held an Rs 100 billion 28 day term repo auction that saw the cut off coming in at 8.43%. The system is borrowed Rs 590 billion in term repo auctions and Rs 400 billion in daily LAF (Liquidity Adjustment Facility) and Rs 72.5 billion in the MSF (Marginal Standing Facility) window. The total borrowing was Rs 160 billion higher last week compared to the week previous to last. Overnight rates are trading at MSF (Marginal Standing Facility) levels of 8.75% on the back of tight liquidity conditions.
Corporate bond market saw five and ten year benchmark AAA corporate bond yields dropping by 10 bps each to close at levels of 9.50% and 9.45% respectively. Five and ten year credit spreads closed up by 9bps and 3bps respectively at 63 bps and 64 bps respectively. Corporate bond yields are likely to follow government bond yields in their downward path in the coming weeks.
OIS (Overnight Index Swaps) market saw the curve invert on the back of tightening liquidity conditions. One and five year OIS yields fell by 7 bps and 11 bps respectively to close at levels of 8.31% and 8.22% and the five over one OIS spread inverted by 4bps to close at 9bps levels. The curve could invert further on expectations of overnight rates trending at MSF levels.