Arjun Parthasarathy
 
The bond market saw yields soften on positive sentiments on interest rates and expectations of pension funds deploying interest inflow in special deposit scheme (SDS) investments.

The ten-year benchmark bonds saw yields fall by 5 bps while the long bonds saw yields drop by 5 bps. The curve flattened with the five-over-thirty segment spread falling to 37 bps from 42 bps seen in the week earlier to last. The curve flattening has been noticeable over the last month with the five-over-thirty spread falling by 18 bps from 55 bps to 37 bps. The ten-over-thirty spread has compressed from 45 bps to 35 bps over the last month.
The swap curve also flattened with the one-over-five spread coming down to negative 3 bps from negative 7 bps over the week.

The buying in long bonds is attributable to positive interest rates sentiments coupled with tight liquidity. Liquidity at the long ends is also higher than short-end liquidity. The 7.99% 2017, 8.20% 2022 and 8.33% 2036 bonds have been dominating volumes. Trader interest coupled with pension funds and insurance firms buying have generated liquidity in the segment. The improved interest rate outlook on global central banks cutting rates has also helped the rally in longs. The short-end has been left behind owing to the Reserve Bank of India’s liquidity tightening measures.

Liquidity as measured by bids for reverse repo/repo in the LAF (liquidity adjustment facility) of the RBI saw bids for repo at 7.75% crossing Rs 45,000 crore as the market was forced to access the LAF window for funds.

Overnight rates hovered around repo levels of 7.75% Call rates are likely to follow liquidity trends and ease once funds come back into the system through government spending and liquidity flows.

Inflation as measured by the wholesale price index came in lower than expected at 3.45% for week ended December 15, 2007.

This week is expected to see the markets continuing with last week’s momentum. However an impending auction of Rs 10,000 crore in the second week of January may see markets look to shift out of current benchmark bonds to new benchmarks that are expected to be issued in the auction.

Government bonds
Government bonds saw the ten-year and thirty-year bonds outperform the rest of the curve. The yield on the benchmark ten-year bond 7.99% 2017 bond was lower by 5 bps to close at 7.82% levels. Five-year benchmark bond yields was flat with the yield on the 7.40% 2012 bond closing at 7.80% levels. Yields on the long bond the 8.33% 2036 closed lower by 5 bps at 8.17% levels. The benchmarks are expected to be reset this year with fresh ten- and thirty-year benchmarks.

Treasury bills, corporate bonds and overnight index swaps

Treasury bills (T-bills) yields were lower last week on reduced supply. The cut-off on the 91-day T-bill auction held on December 26 came in at 7.35% against 7.44% cut-off seen in the previous auction. The 182-day T-bill auction saw the cut off coming in at 7.60% against similar cut off seen in the previous auction. The RBI is auctioning Rs 500 crore of 91-day and Rs 1,000 crore of 364-day T-bills this week.

Corporate bonds saw five-year benchmark bonds yields move lower week-on-week. The five-year AAA bonds were quoting at 9.15 to 9.20% levels lower by around 10 bps week The five-year AAA spreads closed lower by 10 bps at around 120 bps levels.

Overnight index swaps (OIS) saw the swap curve move lower while flattening on improved liquidity outlook. One year OIS yield fell by 10 bps to close last week at 7.10% levels while the five year OIS yield closed lower by 6 bps at 7.07% levels. The one over five spread closed at negative 3 bps from negative 7 bps seen in the week earlier to last.

The author is head, Portfolio Management Services, Sundaram BNP Paribas AMC Ltd. The views expressed by the author are his own and need not represent the views of the organisation in which he works.

Source : DNAIndia