There is heavy congestion in yields in the 9.20% to 9.60% band. On the government bond yield curve, bonds of maturities of 2025 and above are all trading at yields of 9.20% to 9.30%. State Development Loans (SDLs) are trading at yields of 9.50%. On the credit curve, one year CDs (Certificate of Deposits) are trading at levels of 9.30%, two, three, five and ten year AAA corporate bonds are trading at levels of 9.40%, 9.50%, 9.60% and 9.65% respectively.
Government bond yields in the one to ten year maturity segments are trading at levels of 8.70% to 9%. One and five year OIS (Overnight Index Swaps) yields are trading at 8.43% and 8.39% levels respectively. Overnight money market rates are at levels of 8.70% to 8.80%. RBI maintained status quo on the repo rate in its policy review on the 18th of December 2013, leaving the repo rate at 7.75%, reverse repo rate at 6.75% and MSF rate at 8.75%.
The market is looking at a period of stability across yield curves given that the INR is looking more positive than negative on the back of falling current account deficit and Fed calibrating taper of asset purchases, inflation is forecast to have peaked out on falling vegetable prices and the government is sticking to its borrowing plan despite elections and weak revenue growth. The worry of debt swap is receding as the government may carry out the Rs 50,000 crores swap of illiquid papers to liquid papers directly with institutions.
Liquidity has tightened in the system with the market borrowing around Rs 1000 billion from the RBI through LAF (Liquidity Adjustment Facility), term repo and MSF. The market borrowing was Rs 800 billion and Rs 500 billion in the previous two weeks to the last week. Advance tax outflows of around Rs 400 billion have impacted liquidity. Liquidity will improve on the back of advance tax coming back into the system on government spending.
The market will now search for the best position to be in across yield curves. The securities trading in the 9.30% to 9.60% band offers the best opportunity for markets to earn some spread over overnight rates and to take advantage of compression in yield curve spreads. Hence government bonds trading in the 9.20% to 9.30% band, corporate bonds in the 9.30% to 9.60% band and SDLs at 9.50% will see interest in the market.
Bond yields fell across the curve last week on the back of RBI maintaining status quo on rates. Markets were expecting a 25bps repo rate hike. Going forward, market will watch for demand for bonds in the government bond auctions, inflation numbers and FII activity. The government is scheduled to borrow Rs 850 billion through auctions in the next 45 days. Vegetable prices have come off sharply and inflation for December at the wholesale and consumer price levels could come off from November prints of 7.52% and 11.24% respectively. FII’s have turned net buyers of bonds in December 2013 after selling bonds continuously for six months. FIIs turning buyers in bonds is positive for bond and currency markets.