Carry is high
The spread between the overnight rate at around 4% and the 5 year and above g-sec yields range from 280bps to 350bps depending on the maturity of the bond. The one-year OIS rate is close to 5% and even if borrowing costs rise by 100bps in the next one year, traders will still earn spreads of 200bps and above by just borrowing overnight and investing in longer dated g-secs.
However, this carries strategy carries risk if g-sec yields rise fast and prices drop sharply. The market for now is prepared to take this risk and earn easy money by just borrowing short and lending long.
Government Bond Auction-
Name of paper | 5.74% GS 2026 | GOI FRB 2034 | 6.67% GS 2035 | 6.99% GS 2051 |
Cut-off yield | 6.6681% | 5.6473% | 7.3552% | 7.4693% |
Amount accepted (Rs billion) | 90 | 40 | 100 | 90 |
Government bonds, SDL and OIS yield movements
Last week, 10-year benchmark 6.54% 2032 paper yield declined by 4 bps to 7.17%. The 5-year benchmark bond, 6.79% 2027 yield declined by 3 bps to 6.81%. 6.64% 2035 yield lost 9 bps to 7.36%. Long-term paper, 6.99% 2051 yield decreased by 6 bps to 7.46%.
The spread of 10-year bond over 5-year bond declined to 36 bps from 37 bps in the previous week. The 15-year benchmark over 10-year benchmark spread decreased to 19 bps from 23 bps while 30-year benchmark over 10-year benchmark spread decreased to 29 bps from 31 bps on weekly basis.
On weekly basis, 1-year OIS yield declined by 2 bps to 4.97% while 5-year OIS yield decreased by 1 bp to 6.57%.
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