Arjun Parthasarathy

With inflation figures moving way above expectations for two weeks in a row, the bond markets saw yields shooting up week-on-week with that of the 10-year benchmark paper moving up by 28bps.

The market had opened last week on the back of inflation, as measured by the wholesale price index (WPI), coming in at 5.92% against expectations of 5.11% for the week-ended March 8, 2008.

Bond yields rose 10bps on the back of higher-than-expected inflation numbers. That time, the market had also digested a higher-than-expected government borrowing programme for the first half of fiscal 2008-09.

The government is issuing bonds worth Rs 96,000 crore, with April 2008 seeing issuances worth Rs 20,000 crore. Bond yields rose 5bps on the back of the auction calendar announcement.

The inflation numbers for the week-ended March 15, 2008, was released on March 28. This time, it touched 6.68%, against the expected 5.96%.

The higher-than-expected number, for the second week in a row, saw the market in a sell-off mode.

Bond yields rose 13bps after the release of WPI numbers. The market also fretted on the revision in earlier inflation numbers,which were revised higher by as much as 50bps.

The finance minister and Reserve Bank of India (RBI) deputy governor spoke after the release of the WPI figures and they were extremely hawkish on inflation.

The market, which was discounting a rate cut a couple of months ago, is now starting to factor in a rate hike as the RBI tries to curb inflation.

The fiscal year-end saw tight liquidity conditions, with the market accessing the RBI window for funds.

However, money markets were orderly, with overnight rates hovering around the repo rates of 7.75%. The market had earlier feared a repeat of last year when tight money markets saw overnight rates shoot up to over the 50% levels.

Liquidity, as measured by bids for reverse repo/ repo in the liquidity adjustment facility (LAF) of the RBI, saw bids for repo at 7.75% averaging around Rs 12,500 crore for last week.

Overnight rates hovered around the repo rate of 7.75%. Liquidity is likely to ease this week as the government starts spending and advance tax outflows come back into the system. Government bonds Government bonds saw yields shoot up week-onweek.

The yield on the benchmark 10-year bond — the 7.99%, 2017 bond — closed higher by 28bps at the 7.90% levels.

The five-year benchmark bond yields were higher by 19 bps, with the yield on the 7.27%, 2013 bond closing at the 7.72% levels. Yields on the long bond — the 8.33%, 2036 bond — closed higher by 26bps at the 8.38% levels. The ten over thirty spread closed lower by 2bps at the 48bps levels.

Bond yields are likely to be under pressure with the impending auction and increased expectations of rate hikes by the RBI.

Treasury bills, corporate bonds and overnight index swaps

Treasury bill (T-bill) yields were down last week. The cutoff on the 91-day T-bill auction held on March 26 was at 7.23%, against the 7.36% seen in the previous auction.

The 364-day T-bill auction saw the cut-off at 7.35%, against the 7.44% seen in the previous auction. The RBI is auctioning T-bills of the 91-and 182-day tenures worth Rs 500 crore each this week.

Corporate bonds saw the yields fall at the short end of the curve. One-year bank papers saw yields come off by almost 60bps as players built up positions at the short end of the curve on expectations of better liquidity. Yields at the mid and long end of the curve trended higher as government bond yields rose.

The five-year yields were higher by 10bps in the 9.40% to 9.50% range. Five-year AAA bond spreads were lower by 12bps week-on-week at the 159 bps levels, as yields turned sticky at higher levels while government bond yields rose sharply. The market is likely to trade circumspect this week on bearish interest rate sentiments.

Overnight index swaps (OIS) saw the swap curve rise on interest rate concerns. One-year OIS yields moved up by 18bps to close last week at the 7.02% levels while the five-year OIS yields closed higher by 21ps at the 7.24% levels.

The one-over-five spread steepened by 3bps from the 19bps levels to the 22bps levels. OIS yields are expected to be under pressure on negative interest-rate sentiments.

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 : DNA