The beginning of calendar year 2013 will be positive for bond markets and bond yields will fall by 25bps in January 2013. The ten year benchmark government bond the 8.15% 2022 bond will see yields fall to levels of 7.85% from current levels of 8.10% by end of January. RBI third quarter monetary policy review is scheduled for the 29th of January 2013 and markets are widely expecting rate cuts in the review.
The sentiment has turned distinctly positive for bond markets. The government is running cash balance of Rs 90,000 crores, which is deposited with the RBI. The fact that the government is running such high cash balance in the face of lower tax collections with direct tax collection behind targets for the April-November 2012 period is positive. The government can well stick to its fiscal deficit target of 5.3% of GDP for fiscal 2012-13 and is most likely to refrain from additional borrowing for the year.
The high cash balance of the government has tightened liquidity conditions leading to the RBI resorting to government bond purchases to infuse liquidity in the system. RBI has bought bonds worth Rs 39,000 crores in December 2012 and this bond purchases has helped bring down the floating stock of bonds in the market.
Markets are widely expecting inflation to come off in the January – March 2013 period and are expecting the RBI to cut repo rates on the 29th of January. Healthy government cash balance coupled with RBI bond purchases and rate cut expectations will drive down bond yields in the coming weeks.
Liquidity eased last week on the back of RBI bond purchases and on the back of lower demand for funds by banks in the reporting week. Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) of the RBI averaged Rs 140,000 crores on a daily average basis against an average of Rs 159,000 crores seen in the week before last. Liquidity will ease in the first week of January 2013 on government spending and release of December quarter end hoard of funds by the banks.
Corporate bond yields will trend down in the coming weeks on the back of falling government bond yields. Five and ten year benchmark AAA corporate bond yields will fall from current levels of 8.93% and 8.95% respectively. Five and ten year AAA credit spreads rose by 2bps and 4bps respectively week on week to close at levels of 69bps and 70bps respectively. Credit spreads will trend up as government bond yields fall faster than corporate bond yields.
The OIS market saw the yield curve move down week on week on the back of falling government bond yields. One year and five year OIS yields fell by 4bps and 2bps respectively to close at 7.62% and 7.15% respectively. OIS yields are likely to trend down further in the coming weeks on improved bond market sentiments.
Governmentbondauction
The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were the 8.12% 2020 bond for Rs 3000 crores, the 8.20% 2025 bond for Rs 6000 crores and a new thirty year bond for Rs 3000 crores. The cut offs came in at 8.08%, 8.18% and 8.30% respectively. The government is scheduled to hold an Rs 12,000 crore auction this week.