he first week of the new fiscal year saw bond markets stutter at first and then regain composure on the back of bond positive data. The benchmark ten year government bond, the 8.15% 2022 bond saw yields rise to 8% levels from levels of 7.95% during the week before coming off to close the week at levels of 7.93%. Bond yields will continue to trend down in the coming weeks as traders build positions on expectations of rate cuts by the RBI in its 3rd May 2013 policy release.
Bond yield rose initially during the week on worries of a high CAD (Current Account Deficit) that came in at record highs of 6.7% for the third quarter of fiscal 2012-13. RBI does tend to be hawkish on a high CAD, as it believes that it is inflationary in nature. However as the week progressed the bond market received bond yield positive data and this helped drive down bond yields from highs seen during the week. On the domestic front weak auto sales for March 2013, good government cash balances with the RBI and weak credit growth for the last fiscal year helped improve bond market sentiments.
Passenger vehicle and two wheeler manufacturers reported year on year fall in sales ranging from 10% to 66% in the month of March 2013. Domestic demand remains weak on the back of a slowing economy and high interest rates. The government is closing fiscal 2012-13 with a cash balance of around Rs 85,000 crores and this cash buffer will help the government to tide over any temporary cash crunches that it may face in this fiscal. Credit growth from fiscal 2012-13 as of 22nd March 2013 stood at 14.1% as per latest RBI data. Credit growth has come off from 17% levels seen in fiscal 2011-12 and is lower than RBI ‘s projections of 16%. Weak credit growth is a sign of a weak economy as well as a sign of lack of credit risk appetite by the lenders.
On the global front, news of Bird Flu in China drove down equities in China and Hong Kong. Â Bird Flu can potentially harm the economy of China if other countries impose travel and trade restrictions to China. Eurozone unemployment rate rose to a record 12% in the first two months of calendar year 2013 indication the weakness in the Eurozone economy. The ECB has indicated that it will maintain loose monetary policy to prevent the economy from slumping.
US economy saw weak hiring numbers for March with 88,000 jobs added against expectations of 190,000 jobs. Unemployment rate went down to four year lows of 7.6% as fewer workers sought jobs. US ten year bond yields have fallen by 30 bps over the last twenty days on worries of growth in the US economy.
The bond positive data was felt in the first government bond auction for 2013-14. The Bid to Cover Ratio for the Rs 15,000 crores auction was 3.66 times indicating strong demand for bonds in the auction. Traders were light in positions as they went into the first bond auction of the fiscal and weak economic data drove up rate cut expectations. Easing liquidity conditions as banks released fiscal year end fund hoards into the system also helped Bond markets.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased by Rs 77,200 crores week on week with bids for repo averaging Rs 86,800 crores on a daily basis last week against an average of Rs 164,000 crores seen in the week before last. Liquidity is likely to be in a range of Rs 80,000 crores to Rs 100,000 crores deficit in the coming weeks.
One year Certificate of Deposit (CD) yields fell 20bps week on week on easing liquidity conditions. CD yields are likely to fall further on rate cut expectations. Five and ten year benchmark AAA corporate bond yields fell by around 10bps each week on week to close at levels of 8.75% and 8.73% respectively. Corporate bond yields are likely to trend down, as supply is restricted in the beginning of the fiscal.
OIS (Overnight Index Swaps) markets saw the curve come off on the back of rate cut expectations. One and five year OIS yields fell by 5bps and 1bps respectively to close at levels of 7.43% and 7.21%. The inverted five over one OIS spread should start looking to become flat as the market goes closer to the RBI policy date of 3rd May 2013.