Sentiment subdued in bond markets: Jajoo

The mildly positive momentum build-up in the bond markets from Reserve Bank of India's pause in the policy rates as well as a stable rupee was quickly washed out on apprehensions of an aggressive US Fed taper going forward and uncertainty on a new monetary policy framework report to be unveiled by RBI on December 31. Traders expect CPI as the new inflation targeting tool in the upcoming report keeping the markets nervous and jittery. Government bonds began the week on a flattish note at 8.79% as the market tried to draw some comfort from Dr C Rangarajan's comment that fall in vegetable prices is likely to bring down the WPI to 6.5% and CPI to 9.2% for the month of December with the 10-year yield easing to 8.76% for a brief while. However, it was a one-way street down from there as Raghuram Rajan mentioned that holding rates did not mean an intent to pause but that RBI is just waiting to assess incoming data points to decide future action.

While money market rates remained largely stable as the market positioned defensively, benchmark 10-year government bond yields closed the week at 8.96%, up 16 bps and the highest level for year 2013. Globally all key US economic data such as new home sales at 464,000 and weekly initial jobless claims at 338,000 came much better than expectations, putting upward pressure on US bond yields which again closed pretty much at the highest level of the year at 3%. The dollar closed weaker against the euro at 1.3749 vs 1.3649 last week and the rupee was also marginally stronger against the dollar at 61.85 vs 62.04 last week. Ten year AAA corporate bond yields also rose 8 bps to 9.70% from 9.62%, while five year AAA yields rose 9 bps to 9.74% from 9.65%.
 
Systemic liquidity continued to be tight as marginal standing facility balances inched further higher at Rs 26,670 crore from Rs 17,200 crore. Outstanding liquidity adjustment facility balances were marginally lower at Rs 39,650 crore. While overnight rates hugged the MSF rate of 8.75% for most of the week, cut-off on 14 day term repo also stood higher at 8.35% as against 8.01% in previous auction. However, considering that this was the typical quarter end cyclical tightness and that market is defensively crowded at the short end, money market rates were largely flat with three month bank certificates of deposit rated marginally higher by 1 bps to 8.68% while one year drifted lower 2 bps to 9.28% from 9.30%.
 

The market will now take guidance from the much anticipated report from RBI to be published this week on the revised monetary policy framework which is expected to focus on making the CPI index the primary inflation gauging benchmark. In case the report is perceived to be more supportive of a dovish stance than what’s currently priced in, given that the valuations are already cheap notwithstanding a pause in rate hike cycle and the first week of January sees the typical new year buying from pension funds, there could be some easing in the yields next week. However, the underlying sentiment remains subdued and that could be used as a good profit booking opportunity.
 
Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers