The cut off on the new six year bond auctioned for Rs 40 billion last week came in at 8.27% and the bond yield closed 3bps lower at 8.24% post auction. The bond initially traded at levels of 8.50% in the When Issued Market before falling all the way to 8.24%, a fall on 26bps over a four day period.
The benchmark five year bond, the 7.28% 2019 bond closed last week at levels of 8.34%, 10bps higher than the yield on the 8.27% 2020 bond. The new benchmark fourteen year bond, the 8.60% 2028 bond saw yields close at 8.41% levels, down 19bps week on week.
The ten year benchmark bond, the 8.83% 2023 bond, and saw yields close at 8.51% levels down 13bps week on week. The yields on the well traded 8.28% 2027 bond and the 9.20% 2030 bond closed at levels of 8.49% and 8.55% levels. The benchmark thirty year bond, the 9.23% 2043 bond saw yields close at 8.56% levels.
The government bond yield curve is highly skewed and almost completely flat at the longer end. To some extent the skew is due to the new on the run bond issuances with the 8.27% 2020 and 8.60% 2028 bonds trading well below the five and ten year benchmark bonds. However the fact that bonds across maturities of ten to thirty years are trading in a 10bps range makes the curve extremely flat.
A new ten year benchmark bond will be issued in July and if the current yield curve holds, the cut off should come in around 8.20% to 8.25% levels, 25bps lower than the traded levels of 8.51% on the 8.83% 2023 bond.
How will this yield curve shape pan out going forward? Will the skew continue and the flatness stay at the longer end and the whole curve falls or will there be a tendency to normalize the curve? The market is keen on new issuances as they become on the run bonds and hence will continue to trade the new bonds at much lower yields than bonds of higher maturities. Given the lack of a new ten year benchmark bond, the market will position at the longer end until a new ten year benchmark bond is issued, after which the yield curve will steepen at the longer end.
At the extreme short end, yields on 91 days and 182 days treasury bills are at levels of 8.52% and 8.60% respectively indicating that overnight rates are unlikely to come off given advance tax outflows in mid June. Overnight money market yields are likely to stay around 8% levels given term repo auctions by the RBI where market bids for funds are clearing at 8% levels.
Government bond yield curve is likely to stay inverted until the budget of the Modi government in July. Liquidity could ease significantly post budget as government starts to spend and that will bring down overnight rates to below 8% levels.
The OIS market saw five year OIS yields falling by 35bps and one year OIS yields falling by 25bps week on week to close at levels of 7.75% and 8.15% respectively. The five over one OIS spread inverted by 10bps to close at negative 40bps spread. Five year OIS yield is front running rate cuts going forward.
Corporate bond market saw yields fall across the curve week on week with three year, five year and ten year benchmark AAA bond yields falling by 12bps, 15bps and 23bps respectively. Five year AAA credit spreads rose 6bps and ten year AAA credit spreads fell 9bps to close at levels of 57bps and 36bps respectively. Corporate bond yields are likely to fall further as market chases absolute levels of yields.
Liquidity is staying in an Rs 700 billion to Rs 760 billion deficit range. Market borrowing from RBI under LAF (Liquidity Adjustment Facility) and Term Repo was at levels of Rs 760 billion last week from levels of Rs 710 billion seen in the week before last. Advance tax outflows on the 15th of June will increase liquidity deficit in the system.