Debt market focused on key data this week: Jajoo

There may be marginal gains in the first half of the week

Debt market sentiments remained broadly stable with benchmark 10-year government bond trading in a narrow range of 8.78-8.65%, finally closing at 8.74%, down 4 bps for the week. Bonds carried forward the positive close of previous week, trading all the way down to 8.65% on the back of continued drop in US 10-year bond to an intra-week low of 2.58% on the back of moderate economic data and a range bound rupee. European Central Bank and Bank of England maintained status quo on rates which resulted in renewed strength for risk assets. The US dollar which was trading below 1.35 to the euro weakened to 1.3635 for the week. The rupee also continued to gain strength supported by some stability in domestic equities, reported dollar sales from foreign banks and improved manufacturing PMI data for January. The HSBC Manufacturing PMI stood at 51.4 in from 50.7 in December. This was the third consecutive reading above 50 and strongest pace of expansion in the past ten months.

 
The rupee gains continued to trigger bidding bias in government bonds. Further the confirmation on cancellation of the auction initially deferred in January and subsequent announcement of partial completion of government debt switch resulted in 10Y touching 8.65%. However the rally could not sustain as profit taking by traders and a reversal in US treasuries globally weighed on the sentiments. The US 10Y was traded up to 2.72%, 14 bps higher before the release of the crucial January NFP data, eventually settling at 2.68% for the week.
 
Ten year AAA bonds ended 8 bps lower at 9.58% from 9.66%, while five year AAA bonds fell 2 bps to 9.72% from 9.74%. The rupee ended stronger at 62.29 from 62.68. Post market hours on Friday, CSO reported its GDP estimates for FY 14 at 4.9%, marginally higher then consensus of 4.5%. US NFP data for January came in at 113,000 well below Bloomberg survey estimates of 183,000 though unemployment rate inched further down to a 6 year low of 6.6%.

 

Liquidity situation was comfortable throughout the week. LAF balances were marginally higher at Rs 35,000 crore from Rs 31,500 crore. Borrowings from MSF window continued to be negligible. The weighted average cutoff on 14D term repo came in higher at 8.17% compared to 8.05% in previous repo auction. Three month bank CD yields rose 10 bps from 9.44% to 9.54% on sustained supply from bank. One year CD rates eased marginally by 4 bps to 9.61% from 9.65% due to strong demand from mutual funds for fixed maturity plans.
 
In coming week, market focus will mostly be on crucial domestic data points namely IIP and CPI/WPI inflation data. The Bloomberg survey expects CPI to drop further to 9.13% from 9.87% last month while WPI is expected to fall to 5.58% from 6.12%. A possible downside surprise to these numbers, lack of further government bond supplies till fiscal year end coupled with stable rupee may lead to further marginal gains in first half of the week but profit booking is expected to set in at higher levels given the uncertain global environment. As such, bonds are expected to trade in a narrow range next week as well. A vote on account due later on February 17 will provide initial estimates of the government borrowing programme for the next fiscal that could induce some additional volatility.

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