The government bond market will live from bond auction to bond auction until the 2014 election results are out on the 16th of May 2014. The government is auctioning Rs 160 billion to RS 200 billion of bonds weekly until the first week of June 2014.
The bond auction size for the 17th of April 2014 is Rs 200 billion. The market will judge the demand for the auction by investors given that the government is redeeming bonds worth Rs 407 billion on the 16th of April. If the market perceives that there is replacement demand, the bond auction will go through at market level cut offs. However if investors choose not to replace maturing bonds, the auction will see cut offs at higher levels of yields.
The bond market does not have much to play for until elections results. The RBI will stick to its anti inflationary stance on interest rates despite industrial growth coming off. The IIP (Index of Industrial Production) growth for the month of February came in at a negative 1.9% against a positive 0.9% growth seen last year while manufacturing growth was a negative 3.7% against 2.1% seen last year. IIP growth for April-February 2013-14 is at a negative 0.1% while manufacturing growth is at a negative 0.7%.
CPI (Consumer Price Index) inflation is expected to rise to levels of 8.4% for March 2014 against levels of 8.1% seen in February 2014. RBI target for CPI is 8% as of end March 2015.
Government bond yields closed down 10bps to 16bps week on week as the market bought into yields at higher levels. Five and ten year benchmark bonds the 7.28% 2019 bond and the 8.83% 2023 bond saw yields fall by 10bps and 12bps respectively to close at 8.96% and 8.94% levels. Bond yields fell on the back of cut offs coming in at market levels in the Rs 160 billion bond auction held on the 11th of April.
Government bond yields would trade in a range in the coming weeks given weekly auctions.
Corporate bond market saw five and ten year benchmark AAA corporate bond yields rise by 2bps each week on week to close at levels of 9.75% and 9.77% respectively. Credit spreads rose with five and ten year AAA spreads rising by 14bps and 15bps respectively to close at levels of 63bps and 59bps. The market switched out of corporate bonds to government bonds given tight credit spreads leading to the rise in credit spreads. Corporate bond yields will trade at around current levels of yields given the attractive absolute levels of yields.
OIS market saw the curve fall on the back of falling government bond yields with one and five year OIS yields falling by 3bps and 8bps respectively. The five over one OIS spread inverted by 5bps to close at 9bps levels. OIS yields will stay ranged at current levels with tendency for one year OIS yields to fall faster than five year OIS yields on easing liquidity conditions.
Liquidity eased last week as banks demand for funds dropped in the first week of the reporting fortnight. Banks borrowing from the RBI was at Rs 770 billion last week against levels of Rs 966 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.