Fixed income markets staged a partial recovery from the losses of the previous week with liquidity situation improving and on some value buying. Benchmark 10 year government bonds opened weak with yields hitting an intra week high of 9.11%, levels last seen during the currency crisis in mid-2013. Fed minutes released last week suggested officials were concerned markets may perceive interest rate trajectory to be steeper than it intended to convey, pulling US 10 year yields down by 13 bps to 2.62% for the week that also improved sentiments locally. A state loan auction was gobbled up by couple of large insurance companies triggering short covering by traders.
The market recovered ground from then on consistently with the weekly Friday auction drawing huge response as well. The momentum was strong enough for traders to ignore a higher trade deficit of $ 10.5 bn in March compared to $ 8.13 bn in February as exports contracted by another 3.2% and gold imports showed some growth. A fresh round of trader interest in closing moments of the week ensured that benchmark 10 year government bond yields closed 12 bps lower at 8.94% compared to 9.06% last week. Corporate bond yields were higher though as spreads normalized after strong contraction in previous month with 5 year AAA bond yields rising 4 bps to 9.74% from 9.70% and 10Y AAA yield closing 5 bps higher at 9.75% from 9.70%. US dollar once again weakened against the euro on expectation of incremental easing form ECB to 1.3885 from 1.3721 last week. The rupee traded marginally weaker on renewed dollar demand from state run banks and higher trade deficit for March closing at 60.17 vs 60.08 last week. As per data released past market hours on Friday, IIP for February contracted by 1.9% as against growth of 0.1% in January with manufacturing growth contracting by a disappointing 3.7%.
Liquidity conditions improved, helped by inflows from term repos and government spending. The overnight rates hovered close to repo rate of 8% for most part of the week with marginal standing facility balances again standing almost negligible. Liquidity adjustment facility balances stood higher at Rs 17,800 crore vs Rs 5,100 though due to product covering requirements for the next holiday shortened reporting week. Money markets remained lacklustre with 3M PSU Bank CD rates rising by 2 bps to 9.02% from 9.00% and 1Y CD rates inching up 7bps to 9.25% from 9.18%
The all-important CPI data for March will be released this week and analysts expected a marginal uptick as the softening factors of previous two months like vegetable prices seems to be stabilizing at current levels. The sharp recovery this week may be followed up with some profit booking next week as the auction amount also is high at Rs 20,000 crore. Having gyrated wildly in the last two weeks, bond yields may now turn range bound. Corporate spreads having widened in the recent sell-off may trigger some accumulation at current levels. Money market rates having eased sharply in new fiscal year will possibly consolidate at current levels for the rest of the month.
Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers
