The redemption of Rs 407 billion of 7.37% 2014 bond on the 16th of April and the Rs 1970 billion of deposits raised by banks in the last fortnight of March 2014 has led to higher demand for government bonds in the market. Banks have to keep as SLR (Statutory Liquidity Ratio), 23% of deposits and Rs 1970 billion of deposits will have a SLR requirement of Rs 453 billion.
The demand for bonds on the back of replacement of redeemed bonds and for SLR was reflected in the Rs 200 billion government bond auction held on the 17th of April 2014. The auction saw bids worth Rs 615 billion coming in, more than three times the auction size.
Government bond yields fell post auction as bidders who did not get bonds in the auction chased down yields. Bond yields will continue to trend down in the next couple of weeks on the back of strong demand.
Government bond yields trended down last week as good auction demand coupled with core CPI at below 8% levels drew in buyers at higher levels of yields. CPI (Consumer Price Index) inflation for March 2014 printed at 8.31% against a revised rate of 8.03% in February 2014. Core CPI that is stripped of food and fuel fell below 8% for the first time since the index was constructed in 2012. Core CPI was revised down from 8% to 7.9% in February and stayed flat in March.
Government bond yields closed down 9bps to 15bps week on week. Five and ten year benchmark bonds the 7.28% 2019 bond and the 8.83% 2023 bond saw yields fall by 15bps and 9bps respectively to close at 8.81% and 8.85% levels. The well traded 8.12% 2020 bond and the 8.28% 2027 bond saw yields fall by 9bps and 11bps respectively to close at levels of 9.03% and 9.18% respectively. Government bond yields have fallen by 17bps to 27 bps across the curve over the last two weeks.
Corporate bond market saw five and ten year benchmark AAA corporate bond yields fall 10bps each week on week to close at levels of 9.65% and 9.67% respectively. Credit spreads rose with five and ten year AAA spreads rising by 4bps and 1 bps respectively to close at levels of 65 bps and 62 bps. The market would look to buy into credit spreads at current levels given that spreads are up sharply by around 15bps over the last two weeks.
OIS market saw the curve fall on the back of strong auction demand with one and five year OIS yields falling by 3bps and 6bps respectively to close at levels of 8.60% and 8.48%. The five over one OIS spread inverted by 3bps to close at 12bps levels. OIS yields will follow government bond yields in the coming weeks.
Liquidity eased last week as banks were flush with funds post a Rs 1970 billion deposit accretion in the last week of March 2014. Banks borrowing from the RBI was at Rs 740 billion last week against levels of Rs 80 billion seen in the week previous to last. Liquidity is likely to stay easy in the coming week as demand for funds stay low in the system.