Long end yields rise on RBI policy
RBI in its policy review last week signalled its intention to bring down the overhang of excess liquidity of Rs 13 trillion. Given that government finances are in good share with fiscal deficit at just around 33% for the April-August 2021 period and tax collections healthy in a fast improving economy, the need to support government borrowing through government bond purchases in not there.
RBI stopped its GSAP program where it bought long maturity bonds as part of its liquidity calibrating effort. This move drove up bond yields at the longer end of the curve.
The sharp rise in US wage growth despite the weaker than expected September jobs report is expected to drive inflation in the US higher and this pushed up 10 year UST yields to over 1.6%, highest in 3 months. Fed could be forced to hike rates and this would hut government bond yields.
Government bonds, SDL and OIS yield movements
During last week, 6.10% 2031 yield rose by 8 bps to 6.32% while 5.85% 2030 yield increased by 5 bps to 6.25%. 5-year benchmark bond, 5.63% 2026 yield rose by 2 bps to 5.71%. 6.64% 2035 yield gained 8 bps to 6.83%. 6.57% 2033 yield rose by 7 bps to 6.69%. Long-term paper, 7.16% 2050 yield gained 17 bps to 7.11%
The spread of 10-year bond over 5-year bond rose to 61 bps from 55 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined by 1 bps to 37 bps, while 30-year benchmark over 10-year benchmark spread stood unchanged at 71 bps on weekly basis.
Average 10-year SDL auction cut-off rose to 6.90% from 6.84% in previous week while spread rose to 64 bps from 61 bps in previous week.
On weekly basis, 1-year OIS yield rose by 1 bps to 4.02% while 5-year OIS yield increased by 14 bps to 5.47%.
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