Bond market started off 2013 with a bang with rallies in government bonds and corporate bonds. Ten year benchmark government bond have dropped by 10bps and thirty year bond yields have dropped by 15bps in the four days into the new year. The 8.15% 2022 bond is trading at 7.93% levels while the 8.30% 2042 bond is trading at 8.12% levels. Five and ten year AAA benchmark corporate bond yields have dropped 15bps each in the first four trading days in January.
The volumes in government bonds have picked up sharply with trading volumes in the NDS-OM (Negotiated Dealing System-Order Matching) soaring to record highs. Average daily traded volumes last week were at Rs 48,000 crores against volumes of Rs 25,000 crores seen in the week previous to last. Bond markets are in bull frenzy and that frenzy is largely driven by RBI actions. RBI has been buying bonds through OMO (Open Market Operation) purchase auctions in order to infuse liquidity into the market.
The bond purchases of the RBI is taking place on the back of the government running a Rs 90,000 crores surplus cash balance. The surplus cash balance of the government has created a shortfall in system liquidity with banks being forced to borrow over Rs 112,000 crores from the RBI on a daily average basis last week.
The fact that the government is running a surplus balance, which is causing a liquidity deficit in the system has enabled the RBI to reschedule the government borrowing program for the January 2013-March 2013 period. January will only see Rs 12,000 crores of supply against the originally scheduled Rs 24,000 crores of supply. February will see Rs 48,000 crores of supply from originally scheduled supply of Rs 36,000 crores.
The surplus balance of the government has also put paid to worries of the government exceeding its budgeted borrowing for 2012-13. Markets were worried that the government would borrow more on the back of fiscal deficit rising to levels of 5.3% of GDP from budgeted levels of 5.1% of GDP.
Bond markets are partying on the back of lack of fresh issuances of bonds in January and on the back of RBI buying bonds through OMOs. RBI has bought Rs 47000 crores of bonds in the last one month and this bond purchase has helped take out floating stock from the market.
The market is also confident of repo rate cuts taking place in the RBI policy review on the 29th of January 2013. RBI had guided the markets for rate cuts
In its December 2012 policy review and the central bank has no reason to reverse its guidance as there is no cause for sharp rise in inflation or a sharp uptick in economic activity in a one month period.
The bond market may well take down bond yields by another 15bps to 20bps going into the policy review. However once the policy is over and supply starts in February, which is also the budget month, markets will become cautious. Bond yields will rise from lows in end of January but that rise could be temporary if the government succeeds in presenting a budget that shows fiscal consolidation.