3 Jan 2021

When the over Rs 60 trillion Gsec market turns illiquid, it is time to worry a lot

RBI by significantly using its muscle power in the government bond market has sidelined the liquidity providers in the market. Bond traders have almost stopped trading as weekly heavy supply of bonds from the government and states and RBI protecting the yield curve have left them with no appetite to make markets.

author dp
Team INRBonds
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RBI by significantly using its muscle power in the government bond market has sidelined the liquidity providers in the market. Bond traders have almost stopped trading as weekly heavy supply of bonds from the government and states and RBI protecting the yield curve have left them with no appetite to make markets.

 

The result of traders staying away from bond markets is illiquidity and when benchmark bonds are illiquid, everything else from corporate bond yields to loan pricing is distorted. Bubbles are created and when they burst, repercussions are severe, as seen from many past experiences.

 

Since March 2020, weekly average traded volume of government securities (including SDLs and T-bills) has come down significantly as evident from below given table.

Week

Average g-sec traded volume(billion)

2nd-6th March

767.05

9th-13th March

679.77

16th-20th March

450.52

23rd -27th March

173.33

30th March-3rd Apr

227.28

6th-10th Apr

180.29

13th-17th Apr

216.34

20th-24th Apr

484.47

27th-30th Apr

324.37

4th-8th May

491.51

11th-15th May

469.27

18th-22nd May

399.64

25th-29th May

319.09

1st-5th June

267.43

8th-12th June

291.05

15th-19th June

318.76

22th-26th June

274.09

29th Jun-3rd July

425.84

6th-10th July

503.06

13th-17th July

371.76

20th-24th July

304.25

27th-31th July

328.58

3rd-7th August

280.15

10th-14th August

303.82

17th-21st August

289.43

24th-28th August

311.7

31st Aug-4th Sep

419.9

7th-11th Sep

356.77

14th-18th Sep

317.98

21st-25th Sep

208.89

28th Sep-1st Oct

300.77

5th-9th Oct

379.19

12th-16th Oct

321.66

19th-23rd Oct

373.51

26th-29th Oct

401.2

2nd-6th Nov

286.51

9th-13th Nov

230.79

17th-20th Nov

261.86

23rd-27th Nov

285.95

1st-4th Dec

289.93

7th-11th Dec

279.68

14th-18th Dec

200.01

21st-24th Dec

212.56

28th Dec-1st Jan

 180.83

 

 

 

Government bonds, SDL and OIS yield movements.               

During the week, 5.85% 2030 yield stood unchanged at 5.88%, 5.77% 2030 yield declined by 3 bps to 5.90% while 5.79% 2030 bond yield came down 9 bps to 5.89%. 6.45% 2029 bond yield decreased by 4 bps to 5.95%. 5-year benchmark bond, 5.22% 2025, yield declined by 3 bps to 5.04%. Long term paper 7.16% 2050 yield lost 3 bps to 6.54%.

The spread of 10-year bond over 5-year bond (5.22% 2025) declined to 85 bps from 91 bps from previous week. On the other hand, 15-year benchmark over 10-year benchmark spread rose to 37 bps from 31 bps. In the same line, 30-year benchmark over 10-year benchmark spread rose to 66 bps from 59 bps.

In the SDL auction conducted last week, average 10-year SDL yield rose to 6.60% from 6.57% last week. Consequently, spread with G-sec benchmark stood unchanged at 64 bps.

On weekly basis, 1-year OIS yield declined by 2 bps to 3.70% while 5-year OIS yield decreased by 4 bps to 4.61%.

 

                                      

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