Bond markets have nothing to look forward except fresh supply of government bonds starting April 2013. RBI has cut repo rate by 25bps as per market expectations but has indicated that it has low headroom to cut rates further. The government has announced a borrowing program of Rs 349,000 in the April-September 2013 period and the RBI has put out the borrowing calendar that shows a weekly borrowing of Rs 15,000 crores. The borrowing will be heavily skewed in the 10-14 year maturity bucket with over 40% of the borrowing being done by issuing bonds in this segment.
The market reaction was negative to the RBI’s hawkish stance on further rate cuts and yields on the benchmark ten year bond, the 8.15% 2022 bond, moved up by 5bps to trade at 7.91% levels. Bond traders are likely to take the yields on government bonds higher as they empty their books to absorb the fresh bond supply starting in the first week on April. The ten year yield will trend over 8% levels by the end of March from current levels of 7.91%.
April will see issuance of new benchmark bonds in the five and ten year segments of the government bond yield curve. The market will be light on positions going into the auctions, as it would have sold off whatever position it is holding in the current benchmark bonds. Bidding for new benchmark bonds will be aggressive and ten year bond yields will fall in the auctions.
The RBI annual policy review for 2013-14 is slated for the 3rd of May and while RBI has indicated that further rate cuts may not happen, the markets will hope for a more dovish stance. RBI will have to set targets on inflation, GDP growth, credit, deposit and money supply growth for fiscal 2013-14 and it will find that any growth target will be difficult to achieve with a tight monetary stance.
Investors who have invested in long bond funds on the hope of yields trending down should ride the current volatility in bond yields as this volatility has more to do fiscal year end positioning rather than expectations of a higher interest rate regime going forward.