Bond markets reacted negatively to the government borrowing numbers for 2013-14 and ten year benchmark bond yields rose 11bps week on week to close last week at 7.90% levels. The government borrowing program for fiscal 2013-14 is not much higher from 2012-13 borrowing with net borrowing at Rs 484,000 crores and gross borrowing (excluding buybacks) at Rs 579,000 crores. The net and gross borrowing are higher by Rs 17,000 crores and Rs 22,000 crores respectively.
The bond markets were expecting the government to show a lower borrowing program as the government had hinted at using cash balances of around Rs 80,000 crores to meet bond redemptions in 2013-14. The government has chosen to stay silent on how it is going to use its excess cash balance.
The government usually front loads its borrowing in the first half of the fiscal and 65% of gross borrowing will be completed in the first six months of fiscal 2013-14. Markets will expect a total borrowing of Rs 375,000 crores in the first half of the coming fiscal and that would mean a weekly average borrowing of Rs 15,000 crores.
Bond markets have had it easy since December 2012 as the RBI has helped the market absorb a total government bond supply of Rs 84,000 crores. RBI has bought Rs 66,000 crores of bonds through OMO (Open Market Operation) purchase auctions since December 2012. RBI is unlikely to begin a fiscal year with bond purchases as liquidity usually improves in April as banks fiscal year end hoard of funds is released into the system. The supply in April will hit the markets and bond traders will prefer to carry light books going into the auctions.
The market will also have to contend with current on the run bonds going off the run in April as new benchmark bonds are issued. The 8.15% 2022 bond, which is the ten year benchmark bond, will go off the run, as a new 2023 bond will be issued as the ten year benchmark bond. Traders will prefer to exit positions in the 8.15% 2022 bond before the announcement of the new ten year bond auction.
Government bond yields will trend cautiously going into April. Markets will play for rate cuts by the RBI in its 19th March mid term policy review and yields could drop from current levels of 7.90% on the ten year bond. However until new benchmark bond auctions are announced it is highly unlikely that yields will drop much below 7.80% levels on the ten year bond even if rate cuts occur.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased by Rs 14000 crores week on week with bids for repo averaging Rs 113,000 crores on a daily basis last week against an average of Rs 127,000 crores seen in the week before last. Liquidity eased on the back of RBI buying bonds through OMOs. RBI bought close to Rs 20,000 crores through OMOs in the last fortnight. Liquidity is expected to tighten on advance tax outflows expected in mid March.
Corporate bond yields rose in sympathy with government bond yields. Five and ten year AAA benchmark corporate bond yields rose by 12bps and 10bps week on week to close at 8.92% and 8.90% levels respectively. Corporate bond yields will stay sticky at higher levels given current tight liquidity conditions.
OIS (Overnight Index Swaps) yields stayed flat week on week despite rising government bond yields. OIS market is positioning for rate cuts leading to the curve staying stable despite worries on absorption of government borrowing.