Global headwinds to impact bond yields: Jajoo

Domestic fixed income markets pretty much remained on the scripted course last week with money market rates, in bank certificates of deposits segment, falling sharply by about 40 basis points on strong liquidity injection measures by RBI and government bonds remaining flat. In global markets, the US dollar bulls received fresh support with Fed indicating a faster than currently projected trajectory for rate hikes, and for the same reason US 10 year bonds spiked 13 bps to 2.78%. In early reaction to dollar strength and US treasury spike, benchmark 10 year government bond yields spiked to 8.84% from closing levels of 8.80% last week and rupee weakened to 61.33. However, following easing liquidity and strong dollar flows and some bargain hunting, 10 year government bond yields settled back to 8.80%, the same as previous week’s closing.

The rupee continued to strengthen and closed stronger at 60.95 vs. 61.19 last week. RBI announced several incremental liquidity injection measures including term repos of Rs 60,000 crore including to primary dealers, extra marginal standing facility window on March 31 and a buyback of bonds by government for Rs 5,000 crore. Not surprisingly, bank CD rates fell sharply by 40 bps, the segment where mutual fund are the most dominant players. So also fell the yield on 5 year AAA corporate bond yields marginally by 1 basis point while that on 10 year bonds inched up by 1 basis point. T-bill rates were largely unchanged. In line with the market expectations FOMC announced additional taper for $10 bn per month, bringing down the monthly bond purchase to $55 bn now as also indicating that further taper remains well on course. What spooked analysts was the projection of Fed fund rates at 1% by end-2015, which was sharply higher than market consensus triggering a rally in US dollar and a knee-jerk sell-off in US government bonds. The euro which had been appreciating for past several weeks fell to 1.3779 from 1.3914 against the dollar. Five year AAA bonds fell 1 bps to 9.74% from 9.75%, while 10Y AAA bonds rose marginally by 1 bps to 9.73% from 9.72%.

 
As this week experienced the outflow on account of advance tax payments the overnight rates remained very close to MSF rate of 9% for most of the week. However, liquidity injection by RBI helped bring the overnight rates lower to 8%, the repo rate by close of the week. The liquidity adjustment facility borrowings rose marginally to Rs 37,384 crore from 36,471 crore. Marginal standing facility balances stood higher at Rs 9,075 crore. The weighted average cut off for 14D term repo came in at 8.81%.The three month PSU bank CD rates eased 39bps from 9.68% to 9.29%,while one year CD rates fell 36bps from 9.64% to 9.28%.

 

Markets will now focus on the RBI’s monetary policy review due on April 1 where consensus is for a pause in the rate hike cycle. Traders will also focus on hints of any front loading and elements of bond-switch in the H1FY15 borrowing calendar. With currently strong global headwinds and impending start of next year’s borrowing programme, bonds are unlikely to find much depth in any rally that may take place in case of no rate hike in April policy. However, some accumulation for profit booking ahead of that event may prove marginally rewarding. Money market rates are set to ease by another 25-40 bps in early April on cyclical surge in liquidity at that time.

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