 "Bond markets likely to remain volatile: Jajoo")
Fixed income markets had a mixed week with money market rates easing marginally and bond yields hardening slightly amidst very high volatility and a somewhat confusing environment. RBI stayed away from hiking key policy rates in the monetary policy review and indicated that the current tightening measures could be reversed once the rupee stabilises even as immediate policy priority remains that of ensuring stability in currency markets. The market interpreted the policy as somewhat dovish and traders perceived a certain tentativeness towards defending rupee. The rupee, which remained largely range bound in the past two weeks since tightening measures were initiated, breached the 60-mark in no time eventually closing the week above 61 mark for the first time ever. Bond yields that had softened immediately after policy announcement on perceived dovishness also backed up following the rupee weakness.
The US Fed meeting last week was largely a non-event with markets already prepared for tapering sometimes in next few months. US unemployment rate fell to 7.4% in data announced last week, further strengthening the case for an early tapering. Benchmark 10-year 7.16% 2023 bond yield was up 12 basis points for the week at 8.28% while the 10-year AAA corporate bond yields were up by 16 bps. While the T-bill yields at the auctions continue to be high, trading in secondary markets is happening at lower rates. For example, one-year T-bills which got sold at 10.46% in the last auction were trading at 9.75% in the secondary market. Short term certificates of deposit rates also eased by almost 50 bps for the week. Driven by strong demand from mutual funds in fixed maturity plans (FMPs), one-year bank CDs are trading at around 9.80%, lower by 70 bps for the week.
Even after very strong tightening measures from RBI, the rupee hit a new lifetime low last week. Further, even though RBI announced two unscheduled cash management bill auctions during the week, short term rates softened whereas long bond yields continue to inch higher notwithstanding very strong demand from insurance companies and pension funds. There seems to be still surprisingly abundant liquidity with banks that have continued to be the biggest buyers for short maturity assets in the last two weeks notwithstanding a drastic cut-down in funding available from the liquidity adjustment facility window. It would seem that the full impact of the recent tightening measures by RBI is still to be completely felt in the system. Liquidity is likely to tighten further and short term rates to harden further in the coming weeks. Strong initial demand from insurance and pension funds for bonds at current higher levels is also likely to slow down as the government’s borrowing programme is pretty large. Better visibility needs to emerge on a sustainable mechanism for financing the current account deficit. A strong measure like an overseas bond issue or a line of credit from the International Monetary Fund could be possible options. Till that time, bond markets are likely to be volatile in the current range.
Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers
The US Fed meeting last week was largely a non-event with markets already prepared for tapering sometimes in next few months. US unemployment rate fell to 7.4% in data announced last week, further strengthening the case for an early tapering. Benchmark 10-year 7.16% 2023 bond yield was up 12 basis points for the week at 8.28% while the 10-year AAA corporate bond yields were up by 16 bps. While the T-bill yields at the auctions continue to be high, trading in secondary markets is happening at lower rates. For example, one-year T-bills which got sold at 10.46% in the last auction were trading at 9.75% in the secondary market. Short term certificates of deposit rates also eased by almost 50 bps for the week. Driven by strong demand from mutual funds in fixed maturity plans (FMPs), one-year bank CDs are trading at around 9.80%, lower by 70 bps for the week.
Even after very strong tightening measures from RBI, the rupee hit a new lifetime low last week. Further, even though RBI announced two unscheduled cash management bill auctions during the week, short term rates softened whereas long bond yields continue to inch higher notwithstanding very strong demand from insurance companies and pension funds. There seems to be still surprisingly abundant liquidity with banks that have continued to be the biggest buyers for short maturity assets in the last two weeks notwithstanding a drastic cut-down in funding available from the liquidity adjustment facility window. It would seem that the full impact of the recent tightening measures by RBI is still to be completely felt in the system. Liquidity is likely to tighten further and short term rates to harden further in the coming weeks. Strong initial demand from insurance and pension funds for bonds at current higher levels is also likely to slow down as the government’s borrowing programme is pretty large. Better visibility needs to emerge on a sustainable mechanism for financing the current account deficit. A strong measure like an overseas bond issue or a line of credit from the International Monetary Fund could be possible options. Till that time, bond markets are likely to be volatile in the current range.
Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers