Bond market reaction to lowering government bond auction size, strengthening INR and the new RBI governor was distinctly muted. The market chose to play the curve instead of bringing down the curve, indicating that the market is pondering over many factors including RBI policy, Syria tensions and US Fed tapering of bond purchases.
The government bond market saw marginal fall of 3bps in yields on the benchmark ten year government bond, the 7.16% 2023 bond. Yields on the well traded 7.28% 2019 bond and the 8.97% 2030 bond fell by 39bps and 23bps week on week implying that the market was shifting out of the ten year bond and buying into higher yields on the curve.
The government reduced last week’s scheduled borrowing to Rs 10,000 crores from Rs 15,000 crores to help improve market sentiments. However the government held an unscheduled auction of Rs 8000 crores of Cash Management Bills (CMB) during the week to compensate for the lowering of the auction size. Bond yields fell initially on lower bond auction size but then climbed again on worries of government finances.
The new RBI governor Dr. Raghuram Rajan, immediately spelt out measures to strengthen the INR, including opening a swap window for banks for their FCNR (B) deposits and allowing banks to borrow overseas up to 100% of tier 1 capital. The INR gained over 4% from lows against the USD last week on the back of RBI steps.
The bond market shrugged off the INR rise and instead focused on RBI’s intent on price stability and lowering reserve requirement in government securities for banks. RBI’s announcement of a CPI (Consumer Price Inflation) linked savings certificate made the market guess on changing the reference inflation index from WPI (Wholesale Price Inflation) to CPI. CPI is trending at 400bps over the WPI and if CPI becomes the benchmark index, RBI may have to focus on bringing the CPI down rather than on pushing economic growth on a higher path.
RBI is also keen on lowering the SLR (Statutory Liquidity Ratio) for banks from the current level of 23% of NDTL (Net demand and Time Liabilities). Lowering the SLR could reduce banks demand for government bonds leading to issues of supply absorption.
Oil prices rose by 2% last week on worries of military strikes on Syria. Fuel prices in India are set go higher on the back of a weak INR coupled with higher oil prices. Bond market will wait for Syria tensions to ease before taking any bullish bets on bonds.
The US Non Farm Payroll data for August 2013 showed a lower than expected increase in jobs and a fall in unemployment rate. Job additions for August printed at 169,000 against market estimates of 180,000. Job numbers for June and July were revised downwards by a total of 74,000. Unemployment rate fell to 7.3% in August from 7.4% levels seen in July. The Fed is likely to lower the size of its bond purchase program in September given falling unemployment levels. US benchmark treasury yields rose 15bps week on week on expectations of the Fed lowering the size of its asset purchase program.
Corporate bond market saw sharp fall in two and five year benchmark AAA corporate bond yields that fell by 40bps and 25bps week on week respectively. The market bought into higher levels of yields in two to five year maturity corporate bonds. Short to medium term maturity corporate bonds will see good interest if INR stabilizes as FIIs will buy into the attractive yields on these bonds.
OIS (Overnight Index Swap) market saw the yield curve shift down on the back of a strengthening INR. One and five year OIS yields fell by 38bps and 20bps week on week and the curve flattened by 18bps with the five over one OIS spread closing at negative 82bps levels. OIS yield curve will see further flattening if INR stabilizes.
Liquidity eased last week as the government redeemed Rs 46,000 crores of bonds. Borrowing under MSF (Marginal Standing Facility) fell by Rs 47,500 crores last week. MSF borrowing was Rs 24,500 crores as of 5th September against levels of Rs 72,000 crores seen on the 30th of August. Repo borrowing was flat at around Rs 39,600 crores in the LAF (Liquidity Adjustment Facility) auctions of the RBI.