The ten year benchmark bond, the 8.83% 2023 bond closed the fiscal year 2013-14 just off 3bps from its issue yield of 8.83% in November 2013. The bond yield close at 8.80% levels on the 28th of March 2014. Going into April, the 8.83% 2023 bond yield is unlikely to see sharp drop or rise in yields until the general election results are announced in May 2014.
The bond market will judge the absorption of bond supply, RBI policy stance and election results before taking a directional bet on bond yields.
The RBI has released the borrowing calendar for the first half of 2014-15 and supply is heavy in the first two months of the new fiscal year with Rs 680 billion of supply in April and Rs 840 billion of supply in May. The government is borrowing heavily in April and May to fund bond redemptions of Rs 750 billion. The net absorption for the market would be Rs 770 billion but if the market does not want to replace redeemed bonds, then the absorption of supply becomes an issue.
RBI will hold its 1st policy for the new fiscal year on the 1st of April 2014. Market is expecting that rates will be on hold and will seek clarity on liquidity as well as intervention in the currency markets. The INR is trading at eight months highs against the USD and with FIIs pumping money in equity and debt with purchases of USD 3.3 billion in equities and USD 1.9 billion in debt, the INR could well see higher levels in April.
RBI buying USD to shore up reserves would add liquidity into the system and that would be positive for bond yields, especially at the short end of the curve. The short end of the government bond and corporate bond yield curve saw sharp drop in yields last week on the back of easing liquidity expectations in April. 91 days and 182 days treasury bill yields dropped by 33bps and 26bps respectively. One year CD (Certificate of Deposit) yields dropped 20bps while two year corporate bond yields dropped 10bps
The short end will continue to see good buying on expectations of easing system liquidity in April as banks release fiscal year end cash hoards and government bond redemptions add to liquidity.
The bond market is yet to make up its mind on the fiscal policies of the party expected to form the government at the center post elections. The market is wary of pro growth policies that could compromise on the fiscal stance. Monsoons and inflation expectations on the back of rising food prices globally would also prey on the markets mind.
The market borrowed a net of Rs 1470 billion from the RBI last week against a borrowing of Rs 1550 billion seen in the week before last. RBI will open the MSF (Marginal Standing Facility) window on the 29th and 31st of March for banks that require last minute funds given fiscal year end.
Corporate bond yields fell last week with benchmark AAA five and ten year bond yields falling by 11bps and 9bps respectively. Five and ten year AAA credit spreads narrowed by 7bps and 10bps to close at levels of 49bps and 58bps respectively. Corporate bond yields are likely to trend down further given liquidity driven buying expected in April.
OIS (Overnight Index Swaps) market saw the curve flatten on expectations of high liquidity in April. One year OIS yield fell by 8bps while five year OIS yield stayed flat to close at levels of 8.58% and 8.51% respectively and the five over one OIS spread flattened by 8bps to close at 7 bps levels. OIS yield curve is likely to flatten further and could even invert on the back of better liquidity conditions going forward.