Domestic bond yields take cues from US, UK

Highlights:
• Ten year benchmark bond 7.80 per cent 2020 closed at 7.49 per cent touching its Dec figures, down by 15 bps from 7.64 per cent reported last week
• US $ 1 trillion EURO and IMF rescue package to Euro-Zone failed to cheer the world market post announcement
• Flight to Safety witnessed where the money moved out of emerging markets and fled back to US, UK and Germany bonds; yields touched their six-month lows
• India’s headline inflation as measured by Wholesale Price index (WPI) eased to 9.59 per cent in April from 9.9 per cent a month ago
• Liquidity traded at a daily average level of Rs. 28,749 crore
• Income category funds saw an inflow of Rs. 1,77,773 lakh crore in April as compare to an outflow of Rs. 1,64,487 crore as per the data released by AMFI

View &Recommendation:
• Bond yields continue to move down tracking the spurt in buying of US, UK and Germany bonds. The Euro crisis failed to settle down even after the announcement of a rescue package of US $ 1 trillion by other European Union and IMF. The shock waves sent by Euro zone are affecting the currency markets which may lead to a fall in EURO. Equity markets too fall in line with all major world indices going southwards.
• Looking forward, the lower end of the yield curve will continue to trade in range bound. However, in long term, the bond yields may witness upward revisions due to continuous supply of papers.
• The top recommended funds in Ultra Short Term category (erstwhile called as Liquid-Plus Funds) are IDFC Money Manager – Invest Plan – Plan A, HDFC Cash Management Fund – Treasury Advantage and Kotak Floater Fund while in Liquid Fund category, the recommended schemes are HDFC Cash Management Fund – Savings Plan and Reliance Liquidity Fund.

Broader Perspectives:
Though India’s headline inflation figure based on Wholesale Price Index (WPI) narrowed to 9.59 per cent in April from 9.90 per cent a month ago, the government continues to worry from the high figures. The Chief Economic Advisor says that Inflation will continue to fluctuate over the next three months before it starts falling steadily. The WPI topped the 10 per cent mark for the first time in 15 months in February. The higher than the expected inflation put upward pressure on yields. The Industrial Output data as measured by Index of Industrial Production (IIP) slid to 13.5 per cent in March against the market expectation of 15 per cent; manufacturing output grew 14.3 per cent in March compared with 16.1 per cent in February.
The benchmark bond 7.80 per cent 2020 yield dropped below 7.50 per cent level. It closed at 7.49 per cent touching its December figures, down by 15 bps from 7.64 per cent. The G-Sec spread of 10-5 years maturity bonds narrowed to 23 basis points from 27 bps a fortnight earlier. However, the 5-1 year spread widened to 214 bps from 165 bps reported last fortnight. G-Secs rallied following a fall in US Treasury yields, lower IIP and WPI figures. The most traded G-Sec 8.20 per cent 2022 saw yield falling to 7.74 per cent, down by 11 bps. The higher than the expected revenue from 3G auctions will help reducing the high borrowing program. The government is expected to raise Rs. 50,000 crore as against the expected figures of Rs. 35,000 crore. If 2G recommendations as suggested TRAI are implicated by the Telecom Ministry, the government will add additional revenue to its chest. The government issued Cash Management Bills of worth Rs. 6,000 crore at a cut-off yield of 3.87 per cent to pay off its bond redemptions.

The week saw an auction worth Rs. 12,000 crore of Government Securities namely 6.85% G-Sec 2012 (Re-issue), 6.35% G-Sec 2020 (Re-issue) and 8.26% G-Sec 2027 (Re-issue) for a notified amount of Rs. 5,000 crore, Rs. 5,000 crore and Rs. 2,000 crore respectively. All the securities were auctioned off successfully at cut-off yields of 7.24 per cent, 7.54 per cent and 8.22 per cent. There was no devolvement to Primary Dealers. However, the appetite among bond buyers seems to be dampened as the bid to cover ratio slipped below 2X despite a strong bond rally. The 10-year benchmark paper was subscribed to an extent of 1.58 times only. However, there was a strong demand on shorter tenure paper. The bond 6.85% 2012 was subscribed by around 3 times.
Liquidity as measured by bids for reverse repo/repo in the LAF (Liquidity Adjustment Facility) averaged Rs. 28,749 crore against last week average of Rs. 55,491 crore. Banks were also reluctant to lend to each other following weak credit sentiment in the market. The average Call and CBLO rate increased to 3.79 per cent and 3.68 per cent from 3.74 per cent and 3.32 per cent reported last week.