Debt Market Update

Source: Bloomberg

• The G-sec market opened the truncated week on a weak note, being apprehensive about the huge supply lined up for the first half of FY13. The first weekly auction of the FY13 for Rs.180 Bn saw a devolvement of 1195 Cr indicating poor appetite for the bonds. However, value buying emerged post auction and the yields covered some of the lost ground towards the close of the trading week. Nevertheless, the 10 year benchmark yield hardened by 15 bps compared to the previous week, to close at 8.69%.

• RBI auctioned off G-sec worth Rs.180 Bn on 3rd April. The cut offs were as follows: 8.19%GS 2020 at Rs 96.80 (8.76%), 9.15% GS 2024 at Rs 102.31 (8.84%), 8.97% GS 2030 at Rs 99.70 (9.00%), 8.83% GS 2041 at Rs 97.65 (9.06%). RBI chose to devolve Rs 319.20 Cr of 8.19% GS 2020 and Rs 875.96 Cr of 8.97% on primary dealers.

• The cut off for 91 day T-Bill was set at 8.81% and for 364 day T-Bill at 8.34% respectively. The previous cut offs for 91 day T-Bill was 9.02% and 364 day T-Bill was 8.40%. The T-Bill auctions were fully subscribed.

• The activity in the corporate bond market was lack luster, with range bound activity. Tracking the weak sentiments in the sovereigns, the 5 year AAA and 10 year AAA bond ended the week in red at 9.63% and 9.59% respectively, up 8 bps. However, the credit spreads compressed by 5-8 bps, as the intensity of supply pressure is much higher in the G-sec compared to corporate bonds.

• Liquidity deficit improved supported by bond redemption to the tune of Rs.260 Bn and government spending. The average net LAF borrowing was lower at 1.23 Tn compared to Rs.1.76 Tn in the previous week. Some banks tapped the high cost marginal standing facility, due to shortage of SLR securities. While the call rates averaged around 9.15%-9.25%, the CBLO rates ranged between 7.7-8.25%.

• The money market yields softened quite a bit during the week as the liquidity situation started improving. While the 3 month CD rates moved down by 75 bps to close at 9.95%, the 1 year CD rates eased by 25 bps to close 9.95% for the week.

The Week Ahead

• The yields have moved up quite sharply since the announcement of the borrowing calendar. The yields are likely to remain under pressure due to heavy supply going ahead. We expect the 10 year bond to trade in a broad range of 8.55%-8.75% range. However, the fear of any surprise OMO by RBI, as announced in the last week of March, and the expectation of rate cut in the April Policy to be announced on 17th April, may lend support to bond yields at the higher end of the trading range.

•The liquidity deficit is likely to be in the region of Rs.125-1.35 Tn. The corporate bond yields are likely to remain range bound and track the sovereigns, with little scope for further credit spread compression. The money market yields having come off from lofty levels prevailing in the month of March, is likely to remain range-bound, with possibility of mild upward bias on profit booking and fresh issuances. However, any major move on the money market yield could depend on further easing of liquidity situation as well as RBI's move in the coming monetary policy.

Thanks,
Gaurav Agarwal
Head Dealer
DENIP Consultants Pvt Ltd