The improved outlook on the INR did not filter down to bond yields coming off as the market is waiting for the events of Fed FOMC meet and RBI policy review to pass before taking fresh directional positions on bonds. The fact that the government is likely to issue new benchmark bonds in its forthcoming bond auctions is also weighing on bond yields.
The spread between the benchmark ten year bond, the 7.16% 2023 bond and the well traded 8.20% 2025 and 8.33% 2026 bond has widened from 11bps to 50bps over the last two months as the latter bonds have reached RBI’s threshold outstanding limits of Rs 90,000 crores.
The INR strengthened by 2.7% last week on the back of reduced tensions over Syria and on the back of RBI’s moves to improve USD flows. Bond yields showed mixed movements with the 7.16% 2023 bond yield moving down by 7bps while the rest of the curve saw yields move up by 2bps to 3bps week on week.
Economic data released last week saw the CPI (Consumer Price Inflation) come off. CPI for the month of August 2013 came in at levels of 9.52% against levels of 9.64% seen in July 2013. The IIP (Index of Industrial Production) growth number of 2.6% for July 2013 was higher than expected but a closer look at the data revealed that the numbers were not as positive as it looked given discrepancies in the capital goods index.
The Fed meet this week assumes significance, as the central bank is likely to announce lower amounts of bond purchases staring October 2013. Fed tapering off bond purchases is one of the reasons for FII’s selling INR debt worth USD 7 billion in the April-September 2013 period. The reaction from global markets to the Fed’s announcements will set the trend for bond yields going forward.
RBI’s new Governor, Dr. Raghuram Rajan will release the mid term policy review statement on the 20th of September. Bond market will watch for the tone of the statement, whether it is hawkish or dovish. A hawkish statement will cause bond yields to rise further from current levels while a dovish statement will bring down yields.
Corporate bond market saw yields come off as the market bought into absolute higher levels of yields. One, two, five and ten year corporate bond yields came off by 50bps, 20bps, 10bps and 15bps respectively to close at levels of 10.20%, 9.90%, 9.65% and 9.60% respectively. Five and ten year AAA benchmark credit spreads came off by 10bps and 8bps as the market brought down corporate bond yields. Ten year credit spreads are likely to come off further from levels of 92bps on the back of the market buying into higher absolute levels of yields.
OIS market saw one year OIS yields rising by 9bps while five year OIS yields stayed flat week on week. Five over one OIS spread inverted by 9bps to close at 91bps levels. One year OIS yields rose on worries of RBI policy stance.
Liquidity tightened last week as banks shored up on liquidity to meet half yearly demand for funds. Borrowing under MSF (Marginal Standing Facility) rose by Rs 17,000 crores last week. MSF borrowing was Rs 72,500 crores as of 12th September against levels of Rs 55,200 crores seen on the 6th of September. Repo borrowing was flat at around Rs 39,500 crores in the LAF (Liquidity Adjustment Facility) auctions of the RBI. Advance tax outflows on the 15th of September will be negated by Rs 44,000 crores coming in through CMB (Cash Management Bills) maturity and liquidity is not likely to get much tighter from current levels.