Bond yields show sustained uptrend
Heavy 4th quarter borrowing of Rs 3.24 trillion is coming in the wake of rate hikes by the US Federal Reserve looking to come in as early as March 2022 and the union budget for fiscal 2022-23 in around 3 weeks’ time. This is contributing to rising g-sec yields with last week showing sharp upward movement. Outlook is still highly negative despite lockdowns across the country on a surge in covid cases.
Fed December 2021 minutes indicate that the central bank is worried about sustained inflationary trends with tight labour markets exhibiting strong wage push inflation. U.S. labor department said nonfarm payrolls rose by 199,000 last month, well short of the 400,000 expectation. However, the underlying data in the report appeared sturdier, with the unemployment rate falling to 3.9% against expectations of 4.1% while earnings rose by 0.6%, indicating tightness in the labor market.
The budget for fiscal 2022-23 point to an expansionary budget as the government prepares of key state elections this year and general elections in 2024. Government finances are looking good with strong tax collections helping keep fiscal deficit at just 46% of budget in the April- December 2021 period. Government is likely to show a lower fiscal deficit in the budget but keep borrowing at similar levels to this year.
RBI has a tough task of navigating high borrowing, Fed rate hike and rising inflation expectations and controlling bond yields if it plans on rate hikes this year will not suit its policy stance.
Fiscal Deficit- As of 7th Jan 2022, Govt of India’s gross borrowing stood at Rs 9973.57 billion while net borrowing came in at Rs 7828 billion.
GST Collection- During December 2021, GST collection rose by 13% yearly basis to around Rs 1.29 trillion. On cumulative basis, GST collection stood at Rs 10.73 trillion during Apr-Dec 21.
Government bonds, SDL and OIS yield movements
During last week, 6.10% 2031 yield rose by 9 bps to 6.54% while 5.85% 2030 yield decreased by 4 bp to 6.46%. 5-year benchmark bond, 5.63% 2026 yield rose by 12 bps to 5.91%. 6.64% 2035 yield increased by 12 bps to 7.02%. Long-term paper, 7.16% 2050 yield rose by 19 bps to 7.23%.
The spread of 10-year bond over 5-year bond declined to 63 bps from 66 bps in previous week. The 15-year benchmark over 10-year benchmark spread stood at 48 bps, while 30-year benchmark over 10-year benchmark spread increased to 69 bps from 59 bps on weekly basis.
Average 10-year SDL auction cut-off rose to 7.13% from 7.03% in previous week. Consequently, spread rose to 61 bps from 55 bps in previous week.
On weekly basis, 1-year OIS yield rose by 2 bps 4.37% while 5-year OIS yield increased by 20 bps to 5.58%.
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