The benchmark ten year government bond, the 7.16% 2023 bond saw yields close at its highest levels since 19th August 2013. The bond yield closed at 8.99% on the 8th of November 2013, up 32bps week on week. The whole government bond yield curve shifted upwards with benchmark on the run bonds, the 7.28% 2019 bond, the 8.28% 2027 bond and the 9.20% 2030 bond seeing yields rise by 27bps, 25bps and 23bps respectively.
The on the run government bond yield curve is now upward sloping. One, five, ten and thirty year bond yields are trading at levels of 8.60%, 8.80%, 8.99% and 9.33%. respectively. The yield curve was inverted a couple of months ago with one, five, ten and thirty year bond yields trading at levels of 9.90%, 9.45%, 8.92% and 9.33% respectively. The actions of the RBI in lowering the MSF (Marginal Standing Facility) rate by 150bps and raising the repo rate by 50bps has steepened the yield curve from its inverted position.
The corporate bond yield curve too has steepened with one, three, five and ten year benchmark AAA corporate bond yields trading at levels of 9.25%, 9.55%, 9.70% and 9.70% respectively. Five and ten year corporate bond yields are flat on segmented demand from the market as insurance companies and provident funds prefer to buy longer tenor bonds given their nature of liabilities. Corporate bond yield curve was inverted a couple of months ago with one, three, five and ten year bond yields at levels of 10.25%, 10.15%, 9.90% and 9.70% respectively.
OIS (Overnight Index Swaps) yield curve is still inverted with five year OIS and one year OIS yields at levels of 8.36% and 8.48% respectively. The curve was sharply inverted a couple of months ago with five and one year OIS yields at 8.60% and 9.60% levels respectively. The inversion has come off by 88bps over the last two months.
Will yield curves stay steep from here on? The steepness of the yield curves will depend on RBI. The central bank has taken up the repo rate by 50bps from 7.25% to 7.75% over the last two months. Further hikes in the repo rate could make liquidity costlier leading to the market selling off at the short end of the yield curve. The longer end could see demand at higher levels as the markets takes the carry offered by the steepness of the curve. However if the RBI guides the market that it is done with rate hikes, at either 7.75% levels or 8% levels on the repo, the curve will stay steep. Liquidity being priced at the repo rate will give the market confidence to hold assets at the short end of the curve.
At the current juncture there is uncertainty on future RBI actions. The October non farm payroll numbers in the US printed at 204,000 job additions, which was well above market estimates of 120,000 job additions. The unemployment rate rose to 7.3% against 7.2% seen in September 2013. US ten year benchmark treasury yields rose 15bps post the job numbers. Improving labor market in the US could lead to the Fed tapering off asset purchases sooner than expected and that could mean pressure on the INR. RBI may want to keep liquidity tight on worries of INR depreciation.
The system is borrowing around Rs 83,000 crores from the RBI. Bids for repo in the LAF (Liquidity Adjustment Facility) averaged Rs 37,500 crores on a daily basis last week. Term repo outstanding is Rs 38,500 crores (cut off was at 8.30% in the 14 day term repo auction). MSF borrowing was Rs 7100 crores (as of 7th November 2013). Overnight rates closed at 8.6% levels last week and are likely to stay at these levels if market continues to access the MSF window for funds.