The benchmark ten year government bond, the 8.83% 2023 bond saw yields close up by 12bps from lows seen during the day on the 16th of May on Modi being decisively elected the Prime Minister of India. The bond yield closed at 8.83%, up from 8.71% seen during the day and up by 9bps week on week. Why did the bond market choose to sell the ten year bond despite a strong rally in equities with Sensex and Nifty closing at record highs and a rally in the INR that closed up over 0.5% on BJP victory?
The rise in the 8.83% 2023 bond yield on the day of BJP victory may be just coincidental. The bond market is worried about a new ten year benchmark bond being introduced this week and if the new bond is issued, the 8.83% 2023 bond will go off the run and will see a sell off given that the old yen year benchmark bond, the 7.16% 2023 bond is trading at yields of 9.06%, higher by 23bps over the 8.83% 2023 bond. The market nervousness on the issue of a new benchmark bond is due to the fact that the 7.16% 2023 bond was introduced as a new ten year benchmark bond on the 20th of May 2013, almost exactly one year ago.
The government is scheduled to auction Rs 160 billion of bonds this week. A new ten year bond could be issued if the government follows the same pattern as of last year. However given that the 8.83% 2023 bond has an outstanding issuance of Rs 550 billion and the government’s threshold limit for a single bond outstanding is around Rs 900 billion, there is no reason to issue a new ten year bond.
The 7.16% 2023 bond was issued when the benchmark ten year bond last year, the 8.15% 2022 bond, had an outstanding of Rs 830 billion.
The other reason the market sold off the 8.83% 2023 bond could be on worries of the BJP government trying to influence RBI on policy rates. Government interference with RBI functions is inflationary in nature. There have been media reports on BJP being aggressive on growth and wanting RBI to follow suit.
The bond market would wait for the auction stocks to be announced on Monday the 18th of May before taking a call on direction of yields. The new government will take a while to settle down as it has to first present a budget and the worries of conflict with the RBI is unfounded as of now.
RBI should issue the new benchmark ten year bond after the budget in July as it will allow the bond markets enough time to come to grips with the new government’s stance on inflation, deficits and interest rates.
The OIS market saw five year OIS yield closing down 3bps week on week to close at four month lows of 8.21%. The one year OIS yield closed down 5bps at levels of 8.48%. OIS market is factoring better liquidity conditions ahead on expectations of FII flows into debt and equity post BJP election victory.
Corporate bond market saw three year benchmark AAA bond yields fall by 5bps week on week to close at 9.25% levels. Five and ten year AAA corporate bond yields followed government bond yields and rose by 3bps each to close at levels of 9.44% and 9.46% respectively. The corporate bond yield curve steepened as markets bought into the short end on expectations of better liquidity conditions going forward.
Liquidity conditions were steady last week as banks were well funded in the second week of the reporting fortnight. Banks borrowing from the RBI was at Rs 791 billion last week from Rs 685 billion seen in the week previous to last. Liquidity is likely to stay at current levels in the coming weeks given no great drivers impacting fund flows.