Bonds markets had one of its best weeks in a long while with sharp fall in bond yields across the curve amidst record high volumes. The government bond yield curve in the ten over thirty segment flattened as the market bought into the spreads offered by long bonds. The benchmark long bonds the 8.97% 2030 and the 8.30% 2042 bonds saw yields fall by 26bps week on week. The benchmark five and ten year bonds, the 8.07% 2017 and the 8.15% 2022 bonds saw yields fall by 10bps and 16bps respectively. The ten over thirty yield curve spreads fell by 10bps to close at 12bps.
Bond market volumes touched all time highs of Rs 123,725 crores on the NDS-OM (Negotiated Dealing System Order Matching) screen on the 9th of May and the daily average volumes for last week was Rs 74,000 crores against volumes of Rs 46,600 crores seen in the week before last. The week on week surge of 58% in daily average volumes indicate the bullish strength of the market and shows increased participation by all market players on the back of highly bond positive sentiments.
Corporate bond yields followed government bond yields with five and ten year benchmark AAA corporate bond yields falling by 15bps and 17bps week on week respectively. Five year benchmark AAA credit spreads came off by 5bps to close last week at 71bps. Ten year benchmark AAA credit spreads stayed almost flat at levels of 55bps.
OIS (Overnight Index Swaps) markets saw the five over one OIS spread invert by 9bps to close the week at a negative 34bps spread. Five year OIS yields fell by 12bps week on week on the back of falling government bond yields.
The bond markets turned bullish on the back of RBI buying bonds through OMOs (Open Market Operations) to infuse liquidity into the system. RBI bought Rs 9658 crores through the bond purchase auction held on the 7th of May. RBI has stated that it is more comfortable with liquidity deficit at levels of Rs 70,000 crores to Rs 80,000 crores and the central bank is expected to hold more bond purchase auctions in the coming weeks.
System liquidity continues to be in deficit mode with banks borrowing an average of Rs 102,000 crores from the RBI on a daily basis last week. Banks borrowed an average of Rs 86,000 crores on a daily basis in the week before last. Liquidity deficit is predominantly due to cash surplus of the government, estimated at Rs 100,000 crores being parked with the RBI. The fact that the government continues to borrow from the market every week and is not spending the money fast enough is also adding to the surplus liquidity situation.
RBI, when it buys bonds through OMOs is actually funding the government in an indirect way as it takes away bonds from the market on one hand while the government issues fresh bonds to the market on the other hand. The bond market is happy with this situation as the net supply of bonds is reduced and the markets can safely take down bond yields without worrying about the absorption of the bond supply from the government. In a sense, RBI is driving a bond rally though OMOs though its intention is on the liquidity front.
The bond party will continue as global factors and domestic factors are bond positive. Global factors of easing oil prices (down over 8% over the last couple of months) and domestic factors of weak vehicle sales (down 10% in April 2013) and slowing manufacturing and service sector growth (both the PMI or purchasing managers index were down in April) is adding to falling growth and inflation expectations.