Fixed income markets may stabilise after a weak opening: Jajoo

The debt market has already been in correction mode for the past month, with traders running very light positions while FII selling has slowed down

 

Fixed income markets faced further headwinds during the past week. The rupee continued to remain under pressure closing at 60.22, down 1.5% for the week. In addition, crude oil prices spiked up once again due to growing geo-political uncertainties across west Asia and northern Africa. Brent crude prices, which hovered around $100/bl for past few months with softening bias, shot up $5 last week to close at $107.72, up more than 5%. The Dollar index continued to strengthen through the week, first on ECB statement that European monetary policy will remain highly accommodative for an extended period of time and then on better than expected employment numbers in the US. The euro closed 1.5% lower at 1.2829 vs dollar and the yen closed higher than 100 after testing levels as low as 95 last week.  Even though the market found some support mid-week on RBI Governor's comments that RBI is also aware of the growth imperative and that monsoon is an important factor in monetary policy formulation, global factors like stronger dollar, spiking oil prices and rising treasury yields dominated the direction with benchmark 10-year government security finishing 5 bps higher at 7.50%. Corporate bond yields were also higher by 10bps.

One highlight was continued improvement in liquidity through the week with liquidity adjustment facility borrowings falling drastically to under Rs 5,000 crore. Overnight rates reflected by collateralised borrowing and lending obligation fell to 6.40%, well below the repo rate of 7.25%. Very short bank certificates of deposit got bid by dealers at around 7% and CDs up to September maturity were seen trading at 7.50%. However, given the overall negative sentiments, one year CD yields traded up by 7 bps for the week.

After the closing of domestic markets on Friday, employment data in the US turned out better than market consensus, leading to a fresh sell-off in US treasuries and a spike in Dollar index even as US equity markets closed higher. The 10-year US treasury yields are now at 2.74%, a fresh two-year high. According to some analysts, it broadly corresponds to a Fed fund rate of 4% under current circumstances. There were reports that the rupee was already quoting at 61.25 in international markets. Given these developments, debt markets are likely to remain under pressure in the first part of this week. This week will also be heavy on domestic data. June trade deficit is expected to be lower at around $10bn due to lower gold imports. Local markets have already been in correction mode for the past month. Other domestic factors such as inflation and growth remain supportive. Traders are already running very light positions and FII selling in debt has slowed down. The rupee depreciation may also help support a revival in exports to the US and Japan. Markets may thus stabilise after a week opening on Monday.

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