The ten year benchmark bond, the 7.16% 2023 bond saw yields rise to over 9.4% levels last week before RBI stepped in to reduce fear in the bond market. The ten year bond yield last saw levels of 9.4% five years back when inflation was trending at double digit levels and oil prices were heading towards USD 140/bbl. The move to levels of 9.4% for the ten year bond took just three months when the bond was trading at 7.16% levels. RBI moves to tighten liquidity and introduced capital controls to control the INR that crossed Rs 65 to the USD to touch all time lows sent fear into bond markers leading to the sharp rise in bond yields.
RBI announced OMO (Open Market Operations) purchase auction for Rs 8000 crores specifying that it is buying long dated bonds in the auction. RBI wanted to convey to that market that it was uncomfortable with rising bond yields as it hurts growth prospects in the economy by announcing the OMO. RBI also provided relief to banks by allowing them to transfer securities to their HTM (Held to Maturity) portfolio at levels prevailing as of 15th July 2013. Bond yields were 70bps below current levels as of 15th July and banks will avoid mark to market losses if they transfer securities to HTM portfolios. RBI kept the HTM portfolio at 24.5% against SLR levels of 23% allowing banks to transfer excess securities to HTM.
RBI’s moves helped the yield on the 7.16% 2023 bond to trend down to levels of 8.26% from highs of 9.45%. Ten year bond yields are likely to rise before coming off, as the auction supply is heavy this week. RBI will be auctioning Rs 22,000 crores of 48 days CMB (Cash Management Bills, Rs 8600 crores of SDL (State Development Loans), Rs 12,000 crores of Treasury Bills and Rs 18,000 crores of government bonds this week. The total supply of bonds is Rs 60,600 crores. However yields may not rise by very much as there is bond redemption of Rs 46,000 crores on the 3rd of September to negate the supply.
The OMO auction for Rs 8000 crores held on the 23rd of August saw the RBI clearing 75% of the total auction size. RBI may announce an OMO for this week to ease nervous market sentiments.
Corporate bond yields fell along with government bond yields with five and ten year AAA benchmark corporate bond yields falling by 25bps and 75bps respectively. Five and ten year AAA credit spreads closed at 80bps and 100bps levels respectively. The violent moves in the government bond market is taking credit spreads all over the place and unless government bond yields settle down the true levels of spreads will not emerge.
OIS (Overnight Index Swaps) markets saw the curve shift down with one and five year OIS yields falling by 48 bps and 46 bps respectively. The five over one OIS spread was almost flat at negative 104bps levels. OIS curve will start flattening once RBI eases liquidity.
Liquidity tightened last week with borrowing under MSF (Marginal Standing Facility) rising by Rs 12,000 crores. MSF borrowing was Rs 58,200 crores as of 22nd August against levels of Rs 45,800 crores seen on the 16th of August. Repo borrowing stayed around Rs 38,000 crores in the LAF (Liquidity Adjustment Facility) auctions of the RBI.