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Fixed income markets opened weak as expected following better than expected payroll number in US on Friday evening and subsequent spike in US treasury yields, higher crude prices and gain in dollar index. However, in a strange move, unemployment claim data came in surprisingly higher. Some analysts also discovered some devil in the detail as they explained that payroll number rose primarily on part time employment and underlying job growth momentum may not be as strong. The rupee after sliding to a new life time low of 61.22 recovered on strong RBI intervention to near 60.50. At the same time came fresh comments from Fed chairman that the US economy still warranted sustained stimulus. Global markets recovered on renewed hopes of a delayed slowdown in Fed’s bond buyback programme. The euro recovered strongly against the dollar from a low of 1.2830 to as high as 1.3068 by the weekend. The rupee also closed the week stronger at 59.62, a full 1 per cent higher for the week. Bond markets also remained volatile in line with the volatility in rupee.
The benchmark 10 year yield hit a high of 7.60 per cent on Monday in early trades but subsequently recovered to below 7.50 as the rupee showed strength along with regional currencies. Market also drew some support from RBI governor's comments during the week that it will consider both growth and monsoon progress for July policy. Ahead of this weeks auctions, 10Y recovered to 7.48% on bargain hunting by traders. However, market was unable to hold on to gains in final trading session on Friday on apprehensions of a weaker than expected CPI inflation data release over weekend. 10Y eventually closed at 7.53%, 3 bps higher for the week. A primary issue by public sector enterprise Power Grid Corporation drew huge response collecting more than Rs 3000 crs. However, corporate bond spreads continued to widen with sustained FII downloading, widening another 7 bps for the week.
Liquidity tightened during the week possibly due to RBI intervention in forex market with borrowing under LAF window spiking to Rs 766 bn as against a meagre Rs 45 bn last week. Not surprisingly, money market rates tightened another 10 bps with 1Y bank cd now trading at 8.30%. Post market closure on Friday, CPI inflation for June came in at 9.87%, once again inching closer to 10% mark, in spite of a huge base effect. Even though core CPI was lower at 7.50%, an increase in vegetable prices by a whopping 20% did the damage. IIP data for May was shockingly in negative territory at -1.6%. Analysts had expected a moderate increase.
Once again, driven by uninspiring CPI numbers, bond markets are likely to open weak this week. However, negative growth numbers, stable rupee and cheap valuations would possibly provide some support at lower levels. Markets are trading well within the range set after the first round of sell-off following last FOMC meeting. That trend is likely to remain. As such, the trade for now is to play that range.
Mahendra Jajoo is Executive Director & CIO -Fixed Income at Pramerica Asset Managers
