The bond market will take direction from the government borrowing numbers for fiscal 2013-14. The FM will release the gross and net government borrowing numbers for fiscal 2013-14 in the budget presentation on the 28thof February 2013. Bond markets are expecting the government to show a lower net and/or gross borrowing for fiscal 2013-14 than the amount borrowed in this fiscal. Investors are Idiots.com has estimated the borrowing for fiscal 2013-14.
The government cancelled the last bond auction scheduled for this fiscal as it had enough surplus funds and did not want to cause further strain on liquidity. The cancelation of the Rs 12,000 crores bond auction has lowered the total borrowing numbers for this fiscal. The government has borrowed a gross amount of Rs 557,000 crores and a net amount of Rs 467,000 crores in fiscal 2012-13.
The cancellation of the government bond auction helped bring down government bond yields with the benchmark ten year bond yield falling by 4bps week on week. The 8.15% 2022 government bond closed at 7.79% levels last week and the yield on the bond will trend down further if the government shows a market positive borrowing program for the coming fiscal.
Liquidity conditions tightened week on week despite inflow of Rs 10,000 crores from RBI bond purchases and despite the cancellation of the government bond auction of Rs 12,000 crores. Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened by Rs 7000 crores week on week with bids for repo averaging Rs 127,000 crores on a daily basis last week against an average of Rs 120,000 crores seen in the week before last. Liquidity tightened on the back of fiscal year end demand for funds by the banking system and on the back of rising cash balances of the government.
Government cash balances are speculated to have gone up to Rs 100,000 crores as of last week. The rising cash balance of the government is sucking out liquidity from the system at a time of advance tax outflows in mid March. Advance tax outflows coupled with high government cash balances and fiscal year end demand for funds will push up liquidity deficit closer to Rs 200,000 crores.
Money market securities bore the brunt of expected liquidity tightness. One year CD (Certificate of Deposit) yields rose by 25bps week on week to close at 9.40% levels as markets demanded higher liquidity premium to lend to banks. One year CD yields have gone up by around 90bps over the last two months on the back of liquidity issues. CD yields will be pressured until mid March after which yields will start dropping as markets position for lower rates in April 2013.
Corporate bond yields rose week on week on the back of liquidity worries. Five and ten year benchmark AAA corporate bond yields rose around 10bps each and yields closed at 8.82% and 8.80% respectively. Five and ten year credit spreads rose by 13bps and 6bps respectively to close at 86bps levels. Credit spreads will stay pressured until mid March on expectations of tight liquidity conditions.
OIS (Overnight Index Swaps) yields closed almost unchanged week on week as liquidity pressures kept the curve flat despite government bond yields coming off. Five year OIS yield is likely to come off faster than one year OIS yield in the near term if the government borrowing number is market positive