22 Aug 2021

G-sec auctions see demand on global growth worries-Weekly Fixed Income Analysis

Worries over a third wave of covid 19 brought about risk aversion in markets and bond yields declined marginally on global economic growth tapering off. G-sec auction saw demand after a long while.

author dp
Team INRBonds
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Bond auctions go off well after a long time

The Rs 140 billion auction of 6.10% 2031 benchmark 10 year bond saw cut off at around market levels of 6.23%, with the bond fully sold to the bidders. This was a positive for bond markets, as in the last few auctions, the benchmark 5 and 10 year bonds were devolved on to the underwriters. RBI did not want to give the bonds to the bidders at higher than market yields and hence gave the bonds to the underwriters. Market bid at higher levels for the bonds on rising inflation and borrowing worries.

A rising wave of corona virus cases in the US and other parts of the world saw UST yields decline on global growth worries. A continued rise in corona cases could lead to fresh lockdowns and sap demand. Central banks would be forced to keep rates at record lows and pump in more money,  leading to fall in bond yields.

The fact that the last gsec auction went off smoothly would please RBI, as it has been forced to protect yields from rising on waning bond demand. Given that gsec yields have risen by 40 to 60bps from lows in the last one year, market is getting more comfortable with current levels of yields. RBI should also take the signal of the last bond auction going off smoothly to let market determine the yields.

Going forward, bond yields could stabilise at current levels as global growth worries rise.   

Government bonds, SDL and OIS yield movements        

During last week, 6.10% 2031 yield declined by 1 bp to 6.23% while 5.85% 2030 yield remained unchanged at 6.25%. 5-year benchmark bond, 5.63% 2026 yield lost 4 bps to 5.69%. 6.64% 2035 yield declined by 3 bps to 6.83%. 6.57% 2033 yield declined by 2 bp to 6.65%. Long-term paper, 7.16% 2050 yield decreased by 2 bps to 7.18%.

The spread of 10-year bond over 5-year bond rose to 54 bps from 51 bps in previous week.  The 15-year benchmark over 10-year benchmark spread came down by 1 bp to 42 bp, while 30-year benchmark over 10-year benchmark spread declined by 1 bp to 86 bps on weekly basis.

Average 10-year SDL auction cut-off came down to 6.97% from 7% in previous week while spread declined by 3 bps to 74 bps from 77 bps during previous week.

On weekly basis, 1-year OIS yield declined by 3 bp to 3.88% while 5-year OIS yield decreased by 8 bps to 5.16%.

                              

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