The government cancelled the last scheduled auction of the current financial year, citing large cash balances. This signalled a strong likelihood of fiscal deficit being contained at the targeted level of 5.3% for FY13 and brought back cheer to bond markets with the benchmark ten-year bond trading at 7.77%, below the previous low yield of 7.8% achieved ahead of the January rate cut. However, this was immediately followed by news of a likely borrowing target of Rs 6 lakh crore for next year, which subdued the sentiment and triggered some profit booking. Last week closed with ten-year yields trading 3 basis points lower at 7.80%.
One-year bank certificates of deposit (CD) rates also eased by almost 20 basis points (bps) during the week, driven by improved sentiment and revised estimates that the fresh supply in March may not be as high as earlier expectations. Three-month rates, however, inched up another 10 bps as the fresh offering from banks remained in abundance. This also partially reflects market expectations of easier rates post March and the strategy to meet immediate requirements from short term funding.
Overall liquidity remained tight with borrowing under liquidity adjustment facility (LAF) maintained above Rs 1 lakh crore, even though the sentiment was relatively stable. With no fresh open market operations last week, demand from banks is likely to remain elevated next week as well.
This week will be completely driven by news on the Union Budget to be announced on Thursday February 28. All eyes will be on the fiscal deficit for current year and the projection for next year. The market will also focus on subsidy projections for the next year. Also, tax incentives for investment in debt mutual funds are widely expected.
Assessing the overall macro picture and various indications from authorities so far, the Budget should be positive for bonds. Although, as bonds have already begun rallying, there could be some profit booking on further upticks.
Banks may also continue booking profits and generate liquidity to meet higher credit demand, ahead of year end. With advance taxes approaching, liquidity may also get tighter. As such, the outlook should be to continue accumulating at lower levels with a three-month investment horizon rather than any immediate major upside.
One-year bank certificates of deposit (CD) rates also eased by almost 20 basis points (bps) during the week, driven by improved sentiment and revised estimates that the fresh supply in March may not be as high as earlier expectations. Three-month rates, however, inched up another 10 bps as the fresh offering from banks remained in abundance. This also partially reflects market expectations of easier rates post March and the strategy to meet immediate requirements from short term funding.
Overall liquidity remained tight with borrowing under liquidity adjustment facility (LAF) maintained above Rs 1 lakh crore, even though the sentiment was relatively stable. With no fresh open market operations last week, demand from banks is likely to remain elevated next week as well.
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The corporate bond market remained subdued with an overhang of unrelenting supply from PSU entities and the uncertainty on further upside. Bond spreads remained under pressure, widening marginally by 2 basis points during the week.
This week will be completely driven by news on the Union Budget to be announced on Thursday February 28. All eyes will be on the fiscal deficit for current year and the projection for next year. The market will also focus on subsidy projections for the next year. Also, tax incentives for investment in debt mutual funds are widely expected.
Assessing the overall macro picture and various indications from authorities so far, the Budget should be positive for bonds. Although, as bonds have already begun rallying, there could be some profit booking on further upticks.
Banks may also continue booking profits and generate liquidity to meet higher credit demand, ahead of year end. With advance taxes approaching, liquidity may also get tighter. As such, the outlook should be to continue accumulating at lower levels with a three-month investment horizon rather than any immediate major upside.