Bond yields to remain range-bound this week: Jajoo

Fixed income markets broadly remained supported as the sentiment stabilised further last week. The rupee began on a strong note with the recent RBI move to extend the concessional swap facility under overseas direct borrowings, already under negotiation, for banks till December 31, 2013. An agreement reached between Iran and western nations included capping of oil exports at one mn barrel per day for the first six months resulting in softening of crude oil prices, which also aided the sentiment as the move is likely to benefit domestic oil companies. The rupee broadly outperformed its Asian peers during the week. It touched an intra-week low of 62.15 before ending at 62.44 due to month-end demand from domestic oil companies compared to previous week’s closing of 62.86. Tracking the strength in the rupee the yields on existing 10-year as well as the new 10-year fell 9 bps to 8.68% and 8.99% respectively by mid-week.

 
The US initial jobless claims at 316 K came largely better than expected, which led to caution over an early QE tapering. Impending auction supplies then led to profit taking and existing 10-year ended 9.04%, while the new 10 year ended at 8.74%. The momentum was quite strong in corporate bonds as 10-year AAA yields fell 25 bps, while five-year AAA yield fell 14 bps as traders began pricing corporate bond spreads to new 10-year benchmark which was quoting 30 bps lower to existing 10-year benchmark. Ten-year AAA PSU bonds fell to 9.55 % from 9.80% while five-year AAA PSU bonds eased to 9.66% from 9.80%.

 
Post market hours on Friday, India’s GDP for Q2 FY 2014 came at 4.8% broadly in line with market expectations. Manufacturing growth remained subdued at 1.0% despite a sharp pick-up in exports in the quarter. The fiscal deficit continued to disappoint at Rs 45,780 crore for April-October, reaching almost 84% of the budget estimates. RBI unveiled the broad terms of CPI linked NSC’s for retail investors to be launched from December. The coupon on these securities would be linked to final combined Consumer Price Index [CPI (Base: 2010=100)]. Interest rate would comprise two parts - fixed rate (1.5%) and inflation rate based on CPI and the same will be compounded in the principal on half-yearly basis and paid at the time of maturity. The maturity period of these bonds shall be 10 years. RBI also extended the current swap window, due to expire on November 30 till January 31, 2014.

The liquidity adjustment facility balances eased significantly from Rs 41,000 crore to Rs 15,000 crore while marginal standing facility balances continued to be on lower side at Rs 60,300 crore. The cut-off at 14 day term repo this week significantly dropped to 8.13% from 8.59%. As a result major impact was felt on the shorter end of a curve as 3 month bank CD rates fell from 9.22% to 9.08% while 1 year CD rates ended at 9.25% from 9.30%.
 
The extension of the swap window until January 31 where $32 bn has already come in so far, expected stability in the rupee and expectation of positive result in ongoing state elections should help consolidate sentiments in bond markets further next week on the positive side. Introduction of CPI linked bonds and inflationary concerns will weigh on the negative side. Bond yields should thus remain range bound till next series of data on inflation and trade deficit week after. Money market rates are expected to ease further as the repo rate likely to turn into operation rate this week as the term repo cut-off came much lower at 8.13%.  

 
Mahendra Jajoo is Executive Director & CIO - fixed income at Pramerica Asset Managers