Money market security yields rose sharply post RBI policy review on the 28th of January 2014 where the central bank hiked the repo rate by 25bps to lower inflation expectations. Yields on treasury bills, benchmark CDs (Certificate of Deposits) and one year OIS (Overnight Index Swaps) rose week on week as markets positioned for tight liquidity conditions in the face of higher borrowing costs.
Treasury bills yields rose over 20bps week on week with cut offs on the 91 days and 182 days treasury bills auction coming in at levels of 8.90% and 8.95% levels respectively. 91 days and 364 days CDs saw yields move up by 25bps to close last week at levels of 9.4% and 9.5% respectively. One year OIS yield rose by 35bps to close at 8.75%.
The bond market is factoring in a period of tight liquidity given the approach of fiscal year end on the 31st of March 2014. The government is running a surplus of over Rs 40,000 crores and this surplus will increase as 15th March advance tax payments flow in. The country is going into elections in the April- May period and government spending other than for normal functioning will stop. The government will go for a vote on account on the budget this month and a new government will present a full budget in June or July 2014.
RBI has raised the repo rate to 8% from 7.75% and this has taken the Repo – MSF (Marginal Standing Facility) corridor from 7.75% – 8.75% to 8%-9%. RBI has not lifted restrictions on banks access to the repo window for funds in the LAF (Liquidity Adjustment Facility), which is at 0.5% of NDTL that was imposed in July 2013 to contain INR volatility. RBI is conducting term repos to infuse liquidity into the system and also doing selective OMO (Open Market Operations) bond purchase auctions.
The total borrowing by banks from the RBI was Rs 830 billion last week. The system is borrowed Rs 490 billion in term repo auctions and Rs 340 billion in daily LAF (Liquidity Adjustment Facility).
Government bond yields rose last week on the back of rate hikes by the RBI. The well traded 7.28% 2019 bond yield rose by 14bps while the ten year benchmark 8.83% 2023 bond yield rose by 6bps week on week. The 8.28% 2027 bond saw yields rise by 15bps week on week. Government bond yields are likely to stay ranged at current levels given the government has just one auction of Rs 10,000 crores to go before it completes it’s borrowing for this fiscal.
Corporate bond yields rose on the back of rise in government bond yields. Five and ten year benchmark AAA corporate bond yields rose by 10bps and 5bps respectively while five and ten year credit spreads fell by 5bps and 1bps respectively. Corporate bond yields and spreads are likely to stay ranged at current levels in the coming week.
OIS (Overnight Index Swaps) market saw the curve invert on the back of liquidity worries. One and five year OIS yields rose by 35 bps and 22 bps respectively to close at levels of 8.75% and 8.45% and the five over one OIS spread inverted by 13bps to close at 30 bps levels. The spread is likely to stay inverted given expectations of tight liquidity conditions going into March 2014.