The new ten year benchmark bond the 8.15% 2022 bond will see its yields trending down towards 8% in the coming weeks on the back of RBI announcing a fresh OMO (Open Market Operation) bond purchase auction. RBI has announced a Rs 12,000 crores bond purchase auction on the 12th of June 2012 to alleviate liquidity conditions that is expected to tighten in the coming days on the back of first quarter advance tax outflows. System liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI is in deficit of around Rs 90,000 crores. Advance tax outflows of around Rs 35,000 crores to Rs 40,000 crores will add to the deficit prompting the RBI to add liquidity into the system through bond purchases.
Bond markets will cheer RBI’s decision to buy government bonds. RBI is buying the old ten year bond the 8.79% 2021 bond through the OMO and markets will interpret the RBI bond purchase as a demand boost for the new ten year benchmark bond, the 8.15% 2022 bond. The bond is freshly issued with low floating stock and increased demand for the bond will pull down its yields to 8% levels.
The fact that tightness in liquidity caused by advance tax outflows is temporary will help bring down yields on money market securities. RBI infusion of liquidity through OMO is permanent as primary liquidity is added into the system while advance tax outflows come back into the system in the form of government spending. Liquidity will receive a boost from RBI bond purchases. RBI has bought over Rs 55,000 crores of government bonds till date and this liquidity infusion will help keep down any worries of any extreme liquidity tightness in the system. Bank CD (Certificate of Deposit) rates have come off by 25bps from highs with one year bank CD rates trading at 9.75% levels against levels of 10% seen a couple of week back. CD yields will trend down further as worries of liquidity tightness get priced out.
OIS (Overnight Index Swaps) yield curve will trend down from current levels of 7.60% on the one year OIS and 7.25% on the five year OIS. OIS curve will factor in falling government bond yields, expected rate cuts down the line and easing liquidity conditions.
Corporate bond yields were sticky at levels of 9.35% to 9.40% on the five and ten year benchmark AAA corporate bonds. Credit spreads moved up on the back of the cut off on the new ten year benchmark government bond coming in at 20bps below the traded levels of the old ten year benchmark bond. Five and ten year benchmark AAA credit spreads moved up by 10bps and 20bps respectively to close at 95bps and 100bps levels respectively. Credit spreads will stay at higher levels as government bonds rally on the back of RBI bond purchases.
Bond markets will take cues from the IIP (Index of Industrial Production) and WPI (Wholesale Price Index) data to be released this week. Weak IIP growth numbers and lower inflation numbers will add to the positive sentiments of the market as markets will start expecting rate cuts by the RBI in the 18th June policy review.
Government bond auctions and OMO’s
The government auctioned Rs 15,000 crores of bonds last week. The bonds auctioned were the 8.24% 2018 bond for Rs 3000 crores, the new ten year bond for Rs 7000 crores, the 8.97% 2030 bond for Rs 3000 crores and the 8.33% 2036 bond for Rs 2000 crores. The cut offs came in at 8.21%, 8.15%, 8.49% and 8.54% respectively.
There are no government bond auctions scheduled for this week.
OMO purchase auction of Rs 12,000 crores is scheduled for this week.