• Bond yields rallied for the fifth week straight; 10-year benchmark bond 7.80% 2020 settled at 7.37%
• Euro zone crisis continues to led to flight to safety; funds flowing in to US
• 3G auctions fetched Rs. 67,719 crore to government exchequer, much higher than the government expectation of Rs. 35,000 crore; Broadband wireless auction to fetch another Rs. 15,000 crore too
• Comment from a Senior Finance Ministry official that approval of hike in ceiling on FII’s investment in Sovereign Bonds cheered the bond market during the week
• Liquidity remained comfortable; stood at a daily average level of Rs. 42,779 Cr against Rs. 28,749 Cr reported last week
• The 1-10 year YTM spreads decreased by 21 bps to 254 bps
• Government resorted to 28-day Cash Management Bills again over and above its scheduled weekly auction showing that government’s finances are still under pressure
• G-Sec markets are likely to take cues from policy maker statements and will closely watch the Euro Zone for any developments.
• Markets at shorter end of the curve are expected to take cues from liquidity in the system as 3G outflows might put pressure on short term rates.
• The front end of Corporate Bond curve (1 – 5 years) seems to more attractive compared to overnight rates.
Broader Perspectives:
Bond Front
Indian bond markets rallied for the fifth week straight mirroring the US Treasury yields and also on account of positive cues from the domestic market. Higher than expected 3G auctions collection to the tune of Rs. 67,719 Cr along with comments from RBI Governor and Planning Commission Deputy Chairman that the government may cut down its borrowing in FY 2010-11 aided the rally in bond prices. Moreover, European Debt Crisis including ban on naked Short Selling on selective instruments by Germany led to flight to safety, triggering down the US, UK yields. US Treasury yields also fell due to higher than expected unemployment rate. On the last day of week, the 10-year benchmark bond 7.80 % 2020 settled at 7.37 per cent, a fall of 12 bps against last week close of 7.49 per cent. It touched its weekly low of 7.32 per cent. Global risk appetite battered after Germany banned naked short-selling on selective Euro Zone bonds, triggering fears that there may be more trouble from the region in the days to come.
Inflation Front
On the economy front, the inflation continues to worry government with both its indicative tools i.e. Wholesale Price Index (WPI) and Consumer Price Index (CPI) at double digit level. However, Planning Commission Deputy Chairman asserted that India’s Inflation as measured by WPI may fall further in coming 2-3 months. The market is expecting that the softening of yields including softened inflation numbers in coming months may prompt RBI to stall its exit from accommodative monetary policy. Earlier, the RBI has indicated that they will continue to exit from accommodative monetary measures on a regular basis in the face of demand led pressure on inflation. India’s annual inflation rate based on CPI for Rural Labourers fell to 14.96 per cent in April from 15.52 per cent in March. Primary articles inflation also cooled down to 16.19 per cent in the week ended May 08 from 16.76 per cent a week earlier, however, the food articles inflation jumped to 16.49 per cent from 16.44 per cent in the previous week.
Bonds Supply
The government auctioned bonds worth Rs. 13,000 Cr which were subscribed fully with no devolvement to Primary Dealers. The auctioned bonds were 7.02% 2016, 8.20% 2022 and 8.26% 2027 for amounts of Rs. 5,000 Cr, Rs. 5,000 Cr and Rs. 3,000 Cr respectively. The cut-off yields came in at 7.29 per cent, 7.64 per cent and 7.97 per cent respectively. The bid to cover ratio in 8.26% 2027 were around 2.5 times while remaining bonds witnessed subscribing little below 2 times. Moreover, the auctions of these relative liquid bonds added an increasing interest among dealers and buyers. The government also issued 28-day Cash Management Bills (CMB) at an average yield of 3.9225 per cent.
Liquidity Front
Liquidity as measured by bids for reverse repo/repo in Liquidity Adjustment Facility (LAF) remained comfortable. The reverse repo bids averaged Rs. 42,779 Cr from Rs. 28,749 Cr in the previous week. The liquidity may be under strain following the FIIs outflows in term of Portfolio Outflows and payouts for 3G auction bids. The average call rates and repo rates softened to 3.72 per cent and 3.40 per cent from 3.79 per cent and 3.47 per cent a week earlier respectively.
Corporate Bonds Front
Corporate Bonds saw spread closing up. Five and Ten year’s benchmark AAA spreads closed up by 3 bps at 80bps and 109 bps levels respectively. The ten year AAA bond traded at a yield of around 8.60 per cent, lower from 8.68 per cent observed last week.
