31 Mar 2013

New Ten Year Bond Yield Cut Off to be Affected by CAD and Political Worries

Bond markets will expect the government to issue a fresh on the run ten year benchmark bond in its Rs 15,000 crores bond auction scheduled for the 5th of April 2013.

author dp
Team INRBonds
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Bond markets will expect the government to issue a fresh on the run ten year benchmark bond in its Rs 15,000 crores bond auction scheduled for the 5th of April 2013. The yield on the outgoing benchmark bond, the 8.15% 2022 bond is at 7.95% and the cut off the on new ten year benchmark bond should ideally be 10bps lower at levels of 7.85% on pent up demand for the bond by bond and swap traders. However worries on high CAD and worries on mid term polls could see the markets bidding cautiously for the bond. The cut off for the new ten year bond could be even higher than the current traded levels of 7.95% on the old ten year bond.

The bond market is going into the new fiscal on an uncertain note. The record high CAD (Current Account Deficit) of 6.7% of GDP seen in the third quarter of 2012-13 will generate worries for the market on further repo rate cuts by the RBI. RBI has been sounding caution on the negative impact of a high CAD on the economy and if the central bank is of the view that this trend will persist for a while, it may defer any rate cut decisions going forward.

The coalition government at the center is showing signs of instability and there are talks of mid term elections. Political standoffs will lead to volatility across markets of equity, bonds and currency and this would prey on bond traders minds when they look to take fresh positions in the market.

Corporate bond market is likely to see yields at the short end of the curve trend down as liquidity eases. One year CD (Certificate of Deposit) yields are likely to fall from levels of 8.80% to levels of 8.50% on demand for assets by liquid funds that will see strong inflows at the beginning of the new fiscal. Corporate bond yields at the two and three year segment will see bidding interest at levels of 8.80% on easing liquidity. However yields o n benchmark AAA five and ten year corporate bonds will stay sticky at around 8.80% to 8.85% levels on interest rate worries.

Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened by Rs 28,000 crores week on week with bids for repo averaging Rs 164,000 crores on a daily basis last week against an average of Rs 136,000 crores seen in the week before last. Liquidity tightened on the back of fiscal year end demand for funds by the banking system in a holiday shortened week. Liquidity is likely to ease in the first week of April as banks release fiscal year end fund hoards.