The weaker than expected GDP growth forecast for 2012-13 that was released by the CSO (Central Statistical Office) had bond traders building fresh long positions. The bond buying by traders helped bond yields come off from one month highs. Bond markets will now start betting on a repo rate cut in the March 2013 mid quarter policy review of the RBI. The ten year benchmark bond the 8.15% 2022 bond saw yields close at 7.85% down 8bps from highs of 7.93% seen during the week. The bond is likely to see yields trend down further on rate cut expectations.
The CSO released an estimate of 5% GDP growth for fiscal 2012-13. The CSO’s estimate was based on data available till November 2012. The 5% GDP growth estimate is well below the 5.5% and 5.7% growth estimate of the RBI and the government. The GDP growth for 2011-12 was revised downwards from 6.5% to 6.2%. The sharp fall in GDP growth estimates can lead to repo rate cut by the RBI in March as inflation is expected to trend down in the January-March 2013 period. Inflation as measured by the WPI (Wholesale Price Index) is expected to trend below 7% levels from December 2012 levels of 7.18%.
The bullish sentiments of the bond markets post the GDP growth estimate release was seen in the heavy demand in the government bond auction. The government auctioned Rs 12,000 crores of bonds on the 8th of February 2013 and the bids for the auction totaled Rs 42,900 crores implying a bid to cover ratio of 3.57x. The auctioned bonds saw yields trading around 2bps below cut off yields indicating strong auction demand.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased last week. Bids for repo averaged Rs 82,600 crores on a daily average basis last week against an average of Rs 104,000 crores seen in the week previous to last. Release of Rs 18,000 crores from the CRR (Cash Reserve Ratio) cut coupled with government spending for salaries helped ease liquidity. Liquidity is likely to tighten in the coming weeks on the back of year end demand for funds by banks.
Corporate bonds saw yields come off on the back of falling government bond yields. Five and ten year benchmark AAA corporate bond yields closed down by 8bps and 2bps week on week respectively to close at levels of 8.72% and 8.78%. Credit spreads closed mixed with five year credit spreads closing lower by 1bps at 75bps levels and ten year credit spreads rising by 4bps to close at 78bps levels. Corporate bond yields are likely to trend down in the five year and above segment of the curve on rate cut expectations.
OIS (Overnight Index Swaps) market saw the curve shift down marginally with one and five year OIS yields coming off by 2bps and 4bps week on week respectively. OIS yields are likely to trend down further on rate cut expectations.
Government bond auctions
The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were the 8.07% 2013 bond for Rs 3000 crores, the 8.15% 2022 bond for Rs 6000 crores and the 8.97% 2030 bond for Rs 3000 crores. The cut offs came in at 7.87%, 7.87% and 8.05% respectively. The government is scheduled to auction Rs 12,000 crores of bonds this week.