The government auctioned a new thirteen year bond in its bond auction on the 21st of September 2012. The cut off on the bond maturing in 2025 came in at 8.20% levels, just 2bps higher than the traded levels of 8.18% on the benchmark ten year bond the 8.15% 2022 bond. The market bid aggressively for the new paper, the auction amount of which was Rs 7000 crores, on expectations of the yield curve shifting down. A falling yield curve takes up bond prices and the longer the maturity of the bond the higher the price gains.
The near term factors for the bond market are bullish. The government has indicated that it will stick to its budgeted borrowing for the fiscal 2012-13. The diesel price hike effected this month and more fiscal consolidation measures to be taken in end October 2012 are expected to keep the fiscal deficit in check. The government will raise Rs 199,000 crores in the second half of fiscal 2012-13, as it will have completed Rs 370,000 crores of borrowing in the first half of the fiscal. The total gross budgeted borrowing for fiscal 2012-13 is Rs 569,000 crores. Bond markets were worried about the government exceeding its budgeted borrowing for the fiscal on the back of rising subsidy bills and on the back of slowing tax collections due to a weakening economy. The market will not have to worry about extra borrowing for at least three months, as the government will review its finances for more borrowings at the beginning of calendar year 2013.
The expectations of a repo rate cut in the 30th October 2012 policy review of the RBI are high given the fact that the RBI stated in its policy review on the 17th of September 2012 that economic growth will be given importance going forward. The RBI cut CRR (Cash Reserve Ratio) by 25bps in its September 2012 policy review to infuse Rs 17,000 crores of liquidity into the system. RBI expects liquidity to be pressured due to advance tax outflows, busy season credit off take and festive season demand for currency.
Liquidity tightened last week on the back of second quarter 2012-13 advance tax outflows. Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI saw bids for repo averaging Rs 71,000 crores on a daily basis last week against an average of Rs 43,000 crores seen in the week before last. Advance tax outflows led to the higher bids for repo. The advance tax that went out of the system will come back into the system through government spending. The government has been running an overdraft with the RBI, having borrowed Rs 13,100 crores from the RBI through ways and means advances (WMA) as of 14th September 2012. Government requirement for funds are high as it has to compensate Oil Marketing Companies (OMC’s) for their losses sustained in selling fuel at subsidized prices. The subsidy outgo is running at over Rs 45,000 crores in the first five months of the current fiscal.
The expectations of repo rate cut and easing liquidity conditions have driven down yields on money market securities and short term corporate bonds. One year bank CD (Certificate of Deposit) yields have dropped below 9% levels from levels of 9.5% seen a couple of months back. Triple A rated corporate bonds in the two to five year maturity segments have seen yields drop by 25bps over the last couple of months. The market is looking to buy into higher absolute levels of yields in corporate bonds on expectations of an easier interest rate regime going forward.
OIS (Overnight Index Swaps) market saw yields drop across the curve on the back of improved bond market sentiments. One and five year OIS yields fell by 4bps each last week. One year OIS yields are likely to see more receiving on expectations of rate cuts and easing liquidity conditions.
Government bond auctions
The government auctioned Rs 15,000 crores of bonds last week. The bonds auctioned were the 8.19% 2020 bond for Rs 4000 crores, the new thirteen year bond for Rs 7000 crores, the 8.28% 2032 bond for Rs 2000 crores and the 8.83% 2041 bond for Rs 2000 crores. The cut offs came in at 8.25%, 8.20%, 8.58% and 8.55% respectively. The government is scheduled to auction Rs 15,000 crores of bonds this week.