 "Profit booking likely in debt market this week: Jajoo")
The bond markets ended in a euphoric mood as the 10 year government bond fell by a whopping 20 bps. There was an absolute shift in momentum from pessimism to extreme optimism during the course of the week. Government bonds witnessed a secular downward shift in yields, while corporate bonds underperformed after a gap of nearly two months. Initially government securities went through one round of selling spree and as a result 10 year benchmark hit past its three week high at 8.86%. The markets became skeptical of the measures which the new government might need to take to meet the expectations of the voters on boosting the economic growth. It could mean upward revision of the borrowing figures and renewed pressure on the fiscal deficit.
These fears were immediately put to rest as some media reports suggested that various ministries were expected to make a strong case for reduction in subsidies and boosting revenues in their presentations to the new prime minister designate. Then there were reports that the Finmin officials were working on plan to contain fiscal deficit for 2014-15 at 3.8-3.9%, much lower compared to the Interim Budget estimates of 4.1% implying reduction in government borrowings by Rs 25,000 crore. Thereafter economic affairs secretary Mayaram termed this development as untrue. Tracking these developments the 10 year initially slipped to 8.77% followed by wild swings in the range of 8.71% to 8.77%. Although bidding bias remained at every dip as markets kept riding high on the hope of credible fiscal consolidation plans. The clearance of government bond auctions at better than expected prices inflicted further confidence in the markets. Thus 10 year finally closed near its four month low at 8.63% from 8.83%.
The five year AAA bond yields eased further by 5bps from 9.37% to 9.32%, while 10 year AAA bonds inched up marginally by 1bp from 9.35% to 9.36%. In US, the April FOMC minutes noted that continuation of stimulus to recuperate the US labour markets is unlikely to result in an undesirable jump in the inflation rate. Further policymakers also discussed the various tools that the US Fed could use to control short-term borrowing once it decides to raise the Fed funds rate. However, this did not suggest that normalisation would begin any time soon. As a result the US 10 year treasury traded in a narrow range of 2.52% to 2.55%.
Given the sharp downward fall in yields during the week, there may be some profit booking as traders await reaffirmation of the fiscal consolidation plans post the formation of new cabinet and the tone of upcoming RBI monetary policy. Thus, the gains are likely to be capped and government bonds are likely to consolidate. The short end rates are likely to remain stable with some scope for further moderation as government spending is likely to gather further momentum.
These fears were immediately put to rest as some media reports suggested that various ministries were expected to make a strong case for reduction in subsidies and boosting revenues in their presentations to the new prime minister designate. Then there were reports that the Finmin officials were working on plan to contain fiscal deficit for 2014-15 at 3.8-3.9%, much lower compared to the Interim Budget estimates of 4.1% implying reduction in government borrowings by Rs 25,000 crore. Thereafter economic affairs secretary Mayaram termed this development as untrue. Tracking these developments the 10 year initially slipped to 8.77% followed by wild swings in the range of 8.71% to 8.77%. Although bidding bias remained at every dip as markets kept riding high on the hope of credible fiscal consolidation plans. The clearance of government bond auctions at better than expected prices inflicted further confidence in the markets. Thus 10 year finally closed near its four month low at 8.63% from 8.83%.
The five year AAA bond yields eased further by 5bps from 9.37% to 9.32%, while 10 year AAA bonds inched up marginally by 1bp from 9.35% to 9.36%. In US, the April FOMC minutes noted that continuation of stimulus to recuperate the US labour markets is unlikely to result in an undesirable jump in the inflation rate. Further policymakers also discussed the various tools that the US Fed could use to control short-term borrowing once it decides to raise the Fed funds rate. However, this did not suggest that normalisation would begin any time soon. As a result the US 10 year treasury traded in a narrow range of 2.52% to 2.55%.
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The combination of oil subsidy payments and government bond redemptions kept the liquidity comfortable in the system. The overnight rates stayed very close to 8% for most of the week. The overnight liquidity adjustment facility borrowings stood marginally higher at Rs 11,701 crore from Rs 8,914 crore. The marginal standing facility borrowings were negligible at Rs 800 crore. An overall positive undercurrent and stable overnight rates resulted in sharp moderation in short term rates. The three month PSU Bank certificate of deposit rates eased 26bps from 9.01% to 8.75%, while one year certificate of deposit rates fell 13bps from 9.13% to 9.00%.
Given the sharp downward fall in yields during the week, there may be some profit booking as traders await reaffirmation of the fiscal consolidation plans post the formation of new cabinet and the tone of upcoming RBI monetary policy. Thus, the gains are likely to be capped and government bonds are likely to consolidate. The short end rates are likely to remain stable with some scope for further moderation as government spending is likely to gather further momentum.