Bond yields to ease this week: Jajoo

Yields expected to ease by another 10 bps this week, but profit booking may set in at lower levels in second half of next week

Buoyed by comments from Reserve Bank of India that there would be no bond switch this fiscal and announcement of an additional seven-day term repo for Rs 10,000 crore, bond markets picked on the momentum of the last week with benchmark 10-year government bond yield settling lower by 8 basis points at 8.76%. Though benchmark 10-year opened firm at 8.81%, it quickly lost ground as the rupee weakened to 62.47, FOMC minutes sounded hawkish and US jobs data came out strong. Private payrolls in the US rose to 238,000 for December against the expectations of 215,000 followed by FOMC minutes suggested diminishing economic benefits from Fed’s bond buying. Cut-off at US 10-year auction also hit 3% for the first time since 2011 in response to subduing sentiments locally.

However, news of no bond switch this fiscal and additional liquidity injection by an additional term repo which brought the overnight rates back to 7.75% from 8.75% lifted sentiments strongly. The rupee also strengthened to 61.91 from 62.16 for the week, led by suspected intervention from state run banks and dollar sales by foreign banks. Domestic trade deficit for the month of December stood at $10.1 bn as moderation in imports continued and exports growth remained positive albeit at a slower pace. In post market hours on Friday, November IIP came at -2.1% following a -1.8% in October underpinning the hopes of any quick economic recovery. In the US, non-farm payroll data for December registered a dismal growth of 74,000 well below the forecast of 197,000. In reaction, US 10-year treasuries eased 14 basis points to 2.86 per cent from 3% mark on Friday, while euro-dollar pair settled at 1.3670 with the dollar trading weaker paring all its gains. The 10-year AAA corporate bond yields eased 3 bps to 9.62% from 9.65%, while 5-year AAA yields eased 2 bps to 9.64% from 9.66%.

 
With the government maintaining Rs 50,931 crore of excess balances with RBI as reported at the end of December quarter, the overall liquidity crunch was evident as overnight rates remained close to marginal standing facility rate of 8.75% for better part of the week. Liquidity adjustment facility balances stood higher at Rs 33,300 crore from Rs 20,200 crore. MSF balances also crossed Rs 10,600 crore on one of the days. To ease the pressure on overnight rates RBI introduced an additional 7-day term repo window which helped overnight rate ease back to 7.75% by weekend. The cut off on 7-day tern repo was at 8.03% while cut off on 14 day repo stood at 8.11%. Given this, during the week three month bank certificate of deposit rates rose 32 bps from 8.78% to 9.10%, while one-year certificateof deposit rates rose 6 bps to 9.32% from 9.26%.

 

With weaker than expected IIP and with inflation for Dec all set to decline given the fall in vegetable prices during December, RBI is expected to remain on pause in January monetary policy review. Weaker than expected US non-farm pay-roll growth, even though attributed to disruption due to severe winter storms have nevertheless provided reprieve to US 10Y which rallied smartly to 2.86% over weekend. This should provide further momentum to bonds in the coming weeks with bond yields expected to ease by another 10 bps this week. Money market rates may also ease as liquidity situation may also improve with additional term repo. However, outlook on liquidity remains cautious for remainder of the quarter. Profit booking may set in at lower levels in second half of next week. 

 
Mahendra Jajoo is executive director & CIO - fixed income at Pramerica Asset Managers