 "Bond markets to be subdued this week: Jajoo")
Bond markets found little to cheer notwithstanding the much-awaited Reserve Bank of India intervention by way of talking up the market and announcing an open market operation as also dovish statements from the Fed chairperson-designate Janet Yellen. There was some value buying in the beginning of the week after the sharp spike in yields in the previous week. However, CPI coming in at 10.09% and WPI spiking back to 7% after a gap of over six months and the rupee depreciating to 63.90 triggered a fresh sell-off with benchmark 10-year government security touching an intra-week high of 9.13%, the levels last seen in middle of August 2013 at the peak of the currency crisis.
The IIP for September surprised on the downside at 2%, much lower than the expectations of 3.7% led by an anemic growth of 0.6% in manufacturing sector. Even then the worsening trend of WPI inflation strengthened further in October as it surged to 7% for the first time since Feb 2013 with core manufacturing inflation also spiking to 2.58% against 2.06% in the previous month. RBI held an unscheduled press meeting bringing back focus on slowing growth, some softening in core CPI inflation and improvement in the current account as also announcing an open market operation of Rs 8,000 crore to ease liquidity. RBI also comforted the markets by stating that the weak economy, good monsoon raising expectation of increases in food supply, and recent policy rate hikes will provide a disinflationary impetus over time. RBI also implied that given these favorable factors, it may assess the full impact thereof before deciding on further rate hikes. The sentiments in the currency and bond markets improved further as Janet Yellen in her testimony to the US Senate, hinted strongly at continuing support for ongoing bond purchases. The US 10-year yield also eased by 5 bps to 2.70% during the week. The rupee also recovered partially to close the week at 63.12, losing almost 1% during the week.
Given the strong bearish sentiment though and a local holiday on Friday when global markets were open, bonds could not sustain the momentum and lost all the gains with the benchmark 10-year closing the week higher by 3 bps at 9.02%. AAA 10-year PSU bonds ended 15 bps higher at 9.90% from 9.75%, while five-year AAA ticked up 14 bps to 9.86% from 9.72%.
With dollar index weakening further on Friday in global markets, the rupee should find some support this week. Statements from the RBI last week suggest that notwithstanding high inflation, a rate hike in the next policy review is not a given. Dovish statements by Fed also indicate a slower pace of tapering going forward. While the bond markets may remain subdued this week as well, a further sell-off will provide an opportunity to gradually accumulate for some trading gains. As in the past, the current central bank intervention should help stabilise sentiment and help slow down the pace in rise of market yields.
Mahendra Jajoo is Executive Director & CIO-Fixed Income at Pramerica Asset Managers
The IIP for September surprised on the downside at 2%, much lower than the expectations of 3.7% led by an anemic growth of 0.6% in manufacturing sector. Even then the worsening trend of WPI inflation strengthened further in October as it surged to 7% for the first time since Feb 2013 with core manufacturing inflation also spiking to 2.58% against 2.06% in the previous month. RBI held an unscheduled press meeting bringing back focus on slowing growth, some softening in core CPI inflation and improvement in the current account as also announcing an open market operation of Rs 8,000 crore to ease liquidity. RBI also comforted the markets by stating that the weak economy, good monsoon raising expectation of increases in food supply, and recent policy rate hikes will provide a disinflationary impetus over time. RBI also implied that given these favorable factors, it may assess the full impact thereof before deciding on further rate hikes. The sentiments in the currency and bond markets improved further as Janet Yellen in her testimony to the US Senate, hinted strongly at continuing support for ongoing bond purchases. The US 10-year yield also eased by 5 bps to 2.70% during the week. The rupee also recovered partially to close the week at 63.12, losing almost 1% during the week.
Given the strong bearish sentiment though and a local holiday on Friday when global markets were open, bonds could not sustain the momentum and lost all the gains with the benchmark 10-year closing the week higher by 3 bps at 9.02%. AAA 10-year PSU bonds ended 15 bps higher at 9.90% from 9.75%, while five-year AAA ticked up 14 bps to 9.86% from 9.72%.
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Similar sentiments echoed at the shorter end of the curve as three month bank certificates of deposit rates inched up 16 bps to 9.06% from 8.90%. One year bank CD rate ended higher by 11 bps at 9.28% from 9.17%. Marginal standing facility balances stood marginally higher at Rs 11,100 crore from Rs 7,130 crore. A part of the correction in money market yields was also attributed to increase in CD issuances by banks. RBI announced 11 day term repo window, a slight deviation from its earlier policy to conduct seven and 14 day term repos.
With dollar index weakening further on Friday in global markets, the rupee should find some support this week. Statements from the RBI last week suggest that notwithstanding high inflation, a rate hike in the next policy review is not a given. Dovish statements by Fed also indicate a slower pace of tapering going forward. While the bond markets may remain subdued this week as well, a further sell-off will provide an opportunity to gradually accumulate for some trading gains. As in the past, the current central bank intervention should help stabilise sentiment and help slow down the pace in rise of market yields.
Mahendra Jajoo is Executive Director & CIO-Fixed Income at Pramerica Asset Managers