Fixed income markets to move in narrow range this week: Jajoo

Fixed income markets remained choppy amidst renewed fears of an early Fed tapering and high inflation. The markets opened last week on a promising note as the rupee recovered from previous week’s losses on weakness in dollar in global markets on Fed’s dovish comments. The announcement of a new benchmark 10-year government bond auction also improved sentiments slightly. Finance Minister P Chidambaram commented that the recent rise in government bond yields was temporary and expressed hope that yields could come down if food inflation moderated and thereby enabled RBI to take steps to check interest rates. The new 10-year benchmark began to trade in 8.70-8.75% range in when-issued platform but caused realignment in other existing stocks.

 
However, the positive momentum could not be sustained for long and government bond yields inched up again as the release of latest FOMC minutes indicated a stronger case for an early tapering. In the past few months forecasts relating to the timing of this event have been swinging around wildly. Thereafter better than expected retail sales data in the US also suggested diluted impact of recent government shutdown on economic recovery. The weekly jobless claims also came in much lower at 323,000 from 344,000 in previous week. The US 10-year bond yields surged to 2.81%, the highest in last three months. The rupee which at one point traded below 62 earlier last week pared its gains to end the week at 62.86, though closing stronger compared to previous week aided by strong intervention from RBI. The cut-off for new 10-year bond came at 8.83% and it ended the week a tad lower at 8.78%. The existing 10-year benchmark 7.16% 2023 ended at 9.10% up by 8 basis points from 9.02%,while 8.28% 2027 (14 year) ended 10 bps up to 9.11% from 9.01%. Since there was sustained buying by EPFO and pension funds in the corporate bond segment, the five-year AAA corporate bond yields eased 6 bps to 9.80% from 9.86% and  10-year AAA bonds eased 10 bps to 9.80% from 9.90%.

 
Heavy issuances at the short end led to spike in short term rates as 3 month bank CD rates ended at 9.22 from 9.06%, while 1 year CD rates inched up 2 bps to 9.30% from 9.28%.The 11 day term repo saw a higher cut-off at 8.59% from 8.42% in previous 14 day term repo auction. Marginal standing facility balances reduced marginally to Rs 7,800 crore from Rs 11,100 crore.
 

As the dollar strengthens further on talks of early Fed taper and improving economic outlook in the US, the rupee may face some headwinds despite regular intervention from RBI. This may lead to some hardening in bond yields. Such sell-offs would continue to provide opportunities to accumulate bonds to capture tactical moves. This week fixed income markets are expected to move in a narrow band of 10 bps as hope of further open market operations and relatively tempered rate hike expectations especially following the guidance from unscheduled RBI press meet last week is likely to limit upsides on the yield curve. The Q2 GDP data release this week shall provide further cues in terms of expectations from RBI monetary policy.

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