The government bond market is going into the new fiscal year staring 1st April 2013 on a bearish note. Bond yields are up 10bps week on week and are currently trading at levels that are 17bps higher than lows seen in calendar 2013. The benchmark ten year bond the 8.15% 2022 bond is trading at levels of 7.96%, up from levels of 7.86% seen a week ago and up from levels of 7.79% seen in February 2013. The bond yield is likely to cross 8% in the coming few days as markets lighten up ahead of the start of the government borrowing for fiscal 2013-14.
Government bond yields rose despite a 25bps repo rate cut by the RBI in its policy review on the 19th of March. RBI’s lack of positive guidance on future rate cuts pulled down market sentiments. The fact that the benchmark on the run bonds will go off the run once the new borrowing program commences drove traders to sell positions in the bonds to clear their books to absorb the fresh supply. The government will issue new five, ten and fifteen year bonds in April to let the market trade the bonds.
The government announced a gross borrowing of Rs 349.000 crores for the first half of 2013-14. The borrowing is concentrated in the 10 to 14 year maturity bracket with over 40% of issuance being done in these tenors. The first half borrowing amounts to 59% of the full year’s budgeted borrowing, lower than previous year’s first half borrowing that amounted to 69% of the full years borrowing. The market will see weekly auctions of Rs 15,000 crores over the next six months.
Corporate bond yields rose in tandem with government bond yields as fresh supply hit the market. Corporates are issuing bonds to fulfill their full years borrowing targets. Five and ten year AAA rated benchmark corporate bond yields closed higher by 10bps week on week. Corporate bond yields are likely to stabilize at current levels of 8.85% to 8.90% on the ten year and five year bonds respectively as markets anticipate yields coming off in April.
OIS (Overnight Index Swaps) yields rose in sympathy with rise in government bond and rise in corporate bond yields. Five year OIS yields rose 10bps week on week to close at 7.27% levels. OIS yields should stabilize at current levels in anticipation of bond yields coming off in April.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened by Rs 23,000 crores week on week with bids for repo averaging Rs 130,000 crores on a daily basis last week against an average of Rs 107,000 crores seen in the week before last. Liquidity tightened on the back of advance tax outflows and on the back of banks hoarding funds for the fiscal year end. RBI bought bonds worth Rs 6000 crores in the Rs 10,000 crores OMO (Open Market Operation) purchase auction held last week. Liquidity is unlikely to ease despite the OMO on fiscal year end demand for funds.