The mild correction in government bonds last week following the release of RBI April policy minutes was seen as a buying opportunity by the market participants. The benchmark 10-year initially stabilised in the range of 8.85%-8.87%, but the undercurrent remained supportive as the phases of minor price corrections were being utilised by participants to accumulate bonds. The announcement of an additional infusion of Rs 15,000 crore through 7-day term repo on the day of government bond auction resulted in further softening of bond yields.
The release of US Q1 GDP data, the Federal Reserve continuing with its measured taper of $10 bn with no surprise element seen in its FOMC statement resulted in strong gains for US 10-year treasury. In reaction to these global events the domestic 10-year plummeted to 8.79%. The US Q1 GDP slumped to 0.1% which was sluggish even by post-recession standards. Even the stronger April US non-farm payroll data at 288,000 versus consensus of 215,000 with unemployment rate hitting five and a half year low at 6.30% did not bring any meaningful upside to US treasury yields. The analysis of US jobs report suggested that there was sharp increase in people dropping out of labour force and wage growth had also stagnated. The labour participation rate fell to 62.8% from 63% earlier.
These developments resulted in US 10-year treasury hitting its three month low to 2.58%. Back home, the minor profit taking in closing hours led to the 10 year ending at 8.81% down 7 bps from 8.88% in local markets. The five year AAA bond ended lower by 3 bps to 9.49% from 9.52%, while 10 year AAA bonds remained flattish at 9.53% due to lacklustre activity in that segment. Tracking the weakness in US dollar relative to its peers, the rupee staged a smart recovery registering one of the best performance compared to past couple of weeks ending at 60.16 from 60.63.
The continued accumulation of government bonds by traders coupled with some currency leakage in the system led to overnight rates remaining in the band of 8.65% to 8.85% for most part of the week. The liquidity infusion of Rs 60,000 crore through regular 14 day term repo and Rs 15,000 crore through additional 7D Term Repo helped stabilize the overnight rates. They eased near to repo rate towards weekend.
The combination of stronger rupee, softening trend in US bond yields, an all-round participation in the government bond auctions locally and hope of formation of stable government in upcoming election results bode well for the bond markets. With all of these supportive factors at play there has been reversal in extreme negative bets which had built up post monetary policy in the beginning of April. Given this backdrop government bonds are expected to ease further by 5-10 bps. The strategy to remain constructive on the portfolio would be the winner for now. The short end of a curve is likely to remain supportive as a defensive bet.
Mahendra Jajoo is Executive Director & CIO-fixed income at Pramerica Asset Managers
