The bond market will eye liquidity conditions in April to take a view on structural changes in the bond yield curves. The government bond yield curve is flat with one year treasury bill, five and ten year benchmark government bonds trading at levels of 9%, 9.06% and 9.06% respectively. The AAA corporate bond yield curve is more or less upward sloping with one year CD (Certificate of Deposits), three year, five year and ten year benchmark AAA corporate bonds trading at levels of 9.15%, 9.55%, 9.74% and 9.74% respectively.
The medium to long end of the government bond and corporate bond yield curve is hit by negative sentiments on government bond auctions. The first Rs 160 billion auction for fiscal 2014-15 held on the 4th of April saw cut offs coming in at higher levels of yields with yields rising by 20bps to 24bps as the market went into the auction. The cut offs for the auctioned bonds, the 8.35% 2022, the 8.28% 2027, the 9.20% 2030 and the 9.23% 2043 bonds came in at levels of 9.28%, 9.41%, 9.33% and 9.42% respectively. The 9.23% 2043 bond saw devolvement of 28% of auction amount of Rs 30 billion. Bond yields are trading at eight months highs as the market is worried about the absorption of bond supply. Read our analysis on government borrowing for first half of fiscal 2014-15.
The benchmark ten year government bond, the 8.83% 2023 bond saw yields rising by 26bps week on week to close at 9.06% levels. Markets sold off the bond on worries of the government issuing a new benchmark ten year bond even though the 8.83% 2023 bond has an outstanding of only Rs 330 billion, well below threshold limits of around Rs 900 billion where bond issuances stop.
Rising government bond yields took up corporate bond yields with benchmark five and ten year AAA rated corporate bond yields rising by 18bps each week on week. Credit spreads came off as government bond yields rose faster than corporate bond yields. Five and ten year AAA credit spreads came off by 3bps and 8bps respectively to close at levels of 46bps and 50bps. Credit spreads are likely to stay tight, as corporate bond yields turn sticky at higher levels.
Liquidity eased substantially last week as banks released fiscal year end March fund hoards. Banks borrowing from the RBI was at Rs 966 billion last week against levels of Rs 2080 billion seen in the week previous to last. Liquidity will ease further as there is redemption of government bonds for Rs 407 billion coming up on the 16th of April.
The cut off for the Rs 600 billion of 13 day term repo auction held last week was at 8.22% while the Rs 200 billion 3 day term repo auctions saw bids for less than auction size at Rs 189 billion with cut off at 8.01%. Overnight money market rates will come off as liquidity eases and could trade at below the repo rate of 8% in the coming weeks.
Overnight money market rates coming off below 8% will help yields at the short end of the yield curves to come off as the market buys into the short end to take advantage of yield differentials. Market will tend to go long on government and corporate bonds of maturities of below 5 years on the back of easing liquidity conditions.
OIS market saw one year OIS yields rising by 8bps and 5 year OIS yields rising by 11bps on the back of rising government bond yields. One and five year OIS yields closed at levels of 8.66% and 8.62% respectively. OIS market will tend to receive the one year OIS yield given expectations of overnight rates trending at close to repo rate levels leading to one year yields coming off and steepening the yield curve.