Bond markets will have to weigh positives of poor IIP and export growth data and lower inflation data with negatives of higher fiscal deficit, tight liquidity conditions and a weakening Rupee for determining the direction of bond yields. The market closed last week on a mildly positive note with the ten year benchmark bond, the 8.15% 2022 bond yield closing down 2bps week on week on the back of lower inflation numbers.
On the positive side for bond yields IIP growth for September 2012 was negative while export growth for October 2012 was also negative. Inflation as measured by the WPI (Wholesale Price Index) came in below market expectations for the month of October 2012.
The bond market is hopeful of RBI cutting rates in its December 2012 policy review on the back of growth and inflation data. However RBI officials including the RBI Governor are non committal on rate cuts in December.
On the negative side for bond yields, the failure of the 2G spectrum auction where the government managed to raise Rs 9400 crores against a budgeted target of Rs 40,000 crores can increase government borrowing. The government has already indicated a higher than budgeted borrowing of Rs 20,000 crores for fiscal 2012-13 and any increase in that number will place pressure on bond yields as markets fret on the demand-supply gap.
Liquidity as measured by the bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened last week. Bids for repo averaged Rs 108,000 crores on a daily basis last week against an average of Rs 67,000 crores seen in the week previous to last. Liquidity has tightened on the back of festive demand for money and it will have to be seen if money gets back into the system post Diwali.The Rupee closed at its lowest levels in two months on the back of weak trade data. Trade deficit for October 2012 was estimated at USD 21 billion, the highest level for this fiscal. The USD also exhibited broad strength against the majors as Japan is going in for snap elections while Eurozone is in recession (Read weekly equity). The Rupee will be pressured given domestic and global issues and if RBI intervenes to stem the slide, liquidity could go into further deficit.
Corporate bond yields were flat week on week on liquidity worries. Five and ten year AAA corporate bond yields closed at around 9% levels with credit spreads trending marginally higher by 2bps week on week. Five and ten year AAA credit spreads closed at levels of 66bps each and are likely to remain around this level given uncertainties ahead.
OIS (Overnight Index Swaps) yield curve fell last week with one year OIS yields coming off by 4bps and five year OIS yields coming off by 2bps week on week. OIS yield curve is likely to trend higher on liquidity and Rupee worries.
Governmentbondauction
The government auctioned Rs 13,000 crores of bonds last week. The bonds auctioned were the 8.17% 2017 bond for Rs 3000 crores, the 8.15% 2022 bond for Rs 7000 crores and the 8.97% 2030 bond for Rs 3000 crores. The cut offs came in at 8.17%, 8.20% and 8.38% levels respectively. The government is scheduled to auction Rs 13,000 crores of bonds this week.
State governments are scheduled to auction Rs 9140 crores of SDL (State Development Loans) this week.