Highlights:
- Government borrowing schedule of massive Rs. 4.57 lakh crore declared; 63 per cent of total borrowings are front-loaded in first half of fiscal year 2010-11.
- On an average, the weekly borrowing would be in the range of Rs. 11,000 to Rs. 13,000 crore; the May month may witness the maximum borrowing of Rs. 65,000 crore with minimal borrowing of Rs. 22,000 crore in September.
- No Open Market Operations (OMOs) transactions declared; unlikely to put any pressure on yields due to sufficient liquidity.
- The week saw a sudden yearend decline in bond yields following the borrowing schedule declaration; unlikely to sustain the spurt in bond prices.
- Inflationary pressures to continue putting pressures on bond yields.
- The 10-year benchmark G-Sec 6.35 % 2020 to trade in the range of 8-8.5 per cent for most of the year.
- There was a combined transaction of Rs. 9,540 crore under Repo Facility in the last 3 days of Fiscal Year 2009-10.
- The G-Sec spread between 1-5 years have widened to 238 bps from 227 bps in the previous week.
Views & Recommendation:
· For few weeks, the market may absorb the bond issuances without any impact on yields but in long term, the bond yields may witness upward revisions.
· The short-tenure bonds would be in demand in the month of April and May in the current fiscal year due to negligible issuances. This may lead to unexpected hike in prices of short to medium term papers. An opportunity lies ahead in booking profits in short-to-medium term bonds/Income Funds/Short Gilt Funds after a couple of months.
On return basis, Tata G S S M F – Growth (6.67%), UTI G Sec Fund – STP – Growth (5.06%) among others has been front runners under Short-term Gilt Funds in two-year category.
· Liquid Funds and Ultra-Short term Debt Funds (erstwhile called as Liquid-Plus Funds) will continue to see inflows as investors would continue putting their surpluses for a short duration.
Broader Perspective:
The market reacted positively on the announcement of Government Borrowing Schedule; about 63 per cent of total borrowings (Rs. 2.87 lakh crore) are front-loaded in the first half of fiscal year 2010-11. Thus, it would prevent crowding out for private firms as post-October used to be busy borrowing month for them. The market will see an average weekly auction of Rs. 11,000 – Rs. 13,000 crore. The benchmark bond 6.35 per cent 2010 yield saw some swings. The yield fell from 7.85 per cent to as low as 7.74 per cent before closing at 7.85 per cent level again. The 10-year benchmark G-Sec price closed at Rs. 89.90 down from Rs. 90.30 level as on Mar 30, 2010. Bond Prices and Yields move in opposite direction.
The high inflationary pressure is on the top agenda of policy makers as they are closely scrutinizing to negate its effects on yields since it would increase their borrowing costs. The inflation as measured by Wholesale Price Index (WPI) has already touched 9.89 per cent for the month of Feb 2010 and the March figures may touch the double digit. Though the government officials are of the view that inflation would drop down in couple of months citing the high base effect and falling food prices as the prominent reasons, it will continue haunting on non-food sides. The high crude prices including the high petrol and diesel prices for EURO IV vehicles will add pressures to inflation further.
The market may factor into the weekly bond supply and will see a smooth transition of bonds for first few weeks but the yields may harden in the weeks to come citing the absence of any Open Market Operations (OMOs) from the government side.
The other bonds 7.02% 2016 and 7.32% 2014 saw yields moving up 13 bps and 1 bps to 7.59 per cent and 7.25 per cent levels. Corporate bonds also saw yields dropping down. The shorter end of the curve saw yields falling piercingly after March-end liquidity worries went out of the system. The last three days of the fiscal year 2009-10 saw a total repo transaction of Rs. 9,540 crore under Liquidity Adjustment Facility (LAF). The liquidity as measured by Reverse Repo transaction under Liquidity Adjustment Facility (LAF) remained tight with an average volume of Rs. 4,027 crore.
