Synopsis: The USD weakened as disappointing economic data suggested the Federal Reserve may not raise rates. US inflation eased to 3.2%, while falling oil prices boosted the INR, despite stable food inflation in India.
System liquidity stood at Rs 178 billion of deficit level as of 19th Oct 2023. Liquidity absorption through Reverse Repo and SDF stood at Rs 574 billion as of 19th Oct 2023.
As per RBI’s published MPC minutes, the committee remained focused on withdrawal of accommodation to keep inflation progressively aligned to the target rate of 4%. Consequently, liquidity is likely to stay subdued as the central bank has announced to conduct OMO sales of g-secs.
Synopsis: The USD weakened as Fed Chair Powell signalled a steady interest rate stance despite economic strength. Rising Treasury yields and robust US labour market and retail sales influenced markets. INR gained amid USD weakness and central bank support.
The USD strengthened on rising yields and inflation concerns, while the US CPI exceeded expectations. The Federal Reserve maintained a cautious approach, and the IMF raised US growth projections. INR fell but was supported by RBI interventions, with India's trade deficit below expectations and CPI inflation declining but remaining above the 4% target.
The USD strengthened due to positive U.S. economic data and Federal Reserve optimism. Inflation exceeded expectations, oil prices rose, jobless claims were better than expected, and U.S. GDP growth confirmed stability. INR strengthened on eased U.S. Treasury yields and lower U.S. oil prices.
The central bank is expected to keep the repo rate at current level in the wake of both global and domestic factors. Domestic inflation softened in August which is expected to follow a downtrend which provides relief to RBI.
Union Government has notified to borrow Rs 6550 billion during H2FY24. An ultra-long term paper of 50 years maturity has been introduced for the first time.Moreover, Rs 200 billion will be borrowed by Sovereign Green Bonds.
The upcoming addition of Government of India securities is expected to cause domestic bond market to deepen domestic bond market higher FII and FPI inflows. It is expected to have a positive impact on gilt yield in the near term. However, inflation and other macro factors will guide g-sec yield movement.
Strong US economic data and ECB rate hike boosted the USD. US retail sales and jobless claims exceeded expectations. ECB signalled the end of rate hikes amid slowing economic growth. INR struggled despite positive Chinese data; India's CPI inflation cooled.
The g-sec yield curve is flat to inverted and has been so for a while now. Banks, the largest holders of g-secs, are finding that they are earning negative returns from g-sec investments as their borrowing costs are high with deposit rates at over 7.5%. How long can this last?
G-sec yield has declined since the last two weeks after an upward correction. It is expected that domestic inflation will soften from this month. System liquidity also regained surplus level. Going ahead, inflation and US Fed policy outcomes will guide g-sec yield movement.
Synopsis: Federal Reserve Chair Jerome Powell's speech in Wyoming signalled potential interest rate hikes to curb inflation, boosting USD against major currencies. Weakest US business growth noted as INR faced USD pressure.
Rise in domestic inflation and indication of rate hike by US FOMC have ignited g-sec yield to rise. In this scenario, 25 bps rate hike by RBI in next policy meeting cannot be ruled out.
USD ended higher as inflation data lowered rate cut expectations. US CPI rose to 3.2%. Fed officials differed on rates, Powell focused on upcoming data. Chinese trade data disappointed with significant export and import declines.
Owing to higher vegetable prices, inflation is expected to rise. Globally, central banks continue to hike rates. All these factors may prompt the central bank to raise policy repo rate by 25 bps with an end to rate hike cycle.
USD ended the week higher despite Fitch's credit rating downgrade of the United States. Slowing job growth raised hopes for a soft economic landing, yet higher wages may necessitate prolonged Federal Reserve interest rates. INR weakened amid overall risk aversion. Crude oil benchmarks rose with Brent at USD 85.25 and WTI at USD 81.73 per barrel.
USD rose after the Federal Reserve's 0.25% interest rate hike, 11th in 12 meetings, aiming to slow the economy and curb inflation. Unemployment claims declined in the US. INR stayed strong against USD due to improved risk appetite. Oil prices surged amid hopes of avoiding a US recession and OPEC+ meeting concerns.
G-sec yield is expected to remain range bound driven by US Fed rate hike for a short period.
USD ended lower after soft US inflation data, but market expects Fed rate hike. Fed officials remain data-driven, considering more hikes this year. US consumer price index eased to 3% YoY in June. INR rose against USD due to positive sentiment, despite concerns over China's declining exports amid global growth slowdown.
The USD weakened as US non-farm payroll fell short of expectations, while the unemployment rate decreased as predicted. INR faced pressure due to concerns about prolonged interest rate hikes. Oil prices rose on production cuts and positive US economic data.
Owing to statements by the US Fed chairman of possible rate hikes ahead and by rate hikes by the ECB, US and global bond yields have seen sharp movement upwards which has caused domestic gilt yields to rise from lows.
USD strengthened amid risk-off environment from central banks' aggressive tightening. Powell's hawkish stance signalled more rate hikes. US business activity dropped. INR resilient with rising domestic equities. Chinese Yuan weakened after PBOC rate cut to stimulate sluggish local economy.
In the current scenario of falling inflation, g-sec yield is likely to remain subdued in a range bound manner as the central bank to hold current repo rate levels. The Rupee has also strengthened on the backdrop of falling inflation.
USD weakened as the Fed kept rates unchanged but hinted at future hikes. ECB raised rates while PBoC cut rates to support the slowing economy. US retail sales unexpectedly increased. India's inflation eased to a 2-year low. Global central banks' decisions and economic data influenced currency movements and market sentiment.
Indian rupee exchange rate against USD remained stable on weekly basis after RBI’s decision to maintain status quo policy repo rate. Rupee got support as RBI MPC has decided to remain focused on withdrawal of accommodation to control inflation.
Owing to falling consumer inflation and global factors, RBI has continued with the current policy rate. System liquidity has stood in a comfortable position. The g-sec yield curve is expected to exhibit flat to inversion in coming days.
Domestic GDP growth rate stood at 7.2% for FY23 while fiscal deficit has met budgeted target for last fiscal year. Considering these factors and inflation dynamics favour an extended pause in policy repo rates going ahead.
As per latest development, U.S. President Joe Biden and top congressional Republican Kevin McCarthy reached a tentative deal to suspend the federal government's $31.4 trillion debt ceiling. Consequently, it will make USD appreciate against other currencies in the coming days. Indian rupee has appreciated against USD driven by rise in USD inflow.
The USD is gaining strength on hopes of a debt ceiling agreement and anticipation of the Federal Reserve's actions. US jobless claims have fallen, indicating a resilient labor market. Concerns arise over US inflation, while INR weakens despite a positive credit rating update by S&P Global Rating.
Driven by ease in system liquidity, RBI’s pause in rate hike and fall in inflation, the decline in short term yield is higher as compared to that of long- term papers which has made the yield curve to steepen.
INR weakened on declining Indian retail inflation. USD gained despite cooling inflation and job market. US consumer price index eased to 4.9%, below forecasts. Consumer sentiment in the US dropped. Fed raised rates recently.
Declining spread between RBI repo rate and Fed fund rate may even prompt inflows of US Dollar.
USD falls despite a positive US jobs report. The US central bank raised interest rates as expected, but the bigger change was that it no longer anticipates further rate increases to control inflation. The European Central Bank also made some adjustments to its policies, signaling that more tightening would be needed to curb inflation. In India, FPIs returned to equities due to strong corporate earnings.
The USD ended the week lower, with expectations of a rate hike and later cuts from the US Federal Reserve. Inflation grew in March, but at a slower pace, and the University of Michigan consumer sentiment improved. US personal consumption expenditures rose, but the economy slowed down in Q1 2023. The Bank of Japan maintained its monetary policy, and the Indian Rupee appreciated.
Since last one month, 10-year & 5-year government bond yields have come down, driven by RBI’s status quo on policy rates, fall in consumer inflation and easing system liquidity. However, in the view of uncertainty in future inflation levels and high bond supply in coming days, it is yet to see whether this fall will continue or not.
The INR is experiencing a decline due to negative market sentiment, while the USD is gaining strength following comments from the Federal Reserve regarding potential interest rate hikes. In the US, there are signs of a slow weakening of the labour market, as jobless claims rise slightly above expectations, while existing home sales experienced a decline in March following a notable increase in February. Overall, the report provides insights into the current state of the currency and global bond markets.
Short end yields to trend down on easing consumer inflation and high surplus liquidity
During the auction of government bonds on 6th April, auction cut-off yield came down as compared to that in auctions conducted during the end of FY23. This bullishness can be attributed due to RBI’s pause in rate hike recently conducted at the MPC meeting. On 6th April auction cut-off yield of New 5-year paper, 7.26% GS 2033 & 7.36% GS 2052 stood at 7.06%, 7.21% & 7.35% respectively as compared to cut-of yield of 7.40%, 7.45% & 7.38% of the papers 7.10% GS 2029, 7.10% GS 2029 & 7.40% GS 2062 respectively.
USD ended the week lower as weak economic data support the idea that the U.S. Federal Reserve may be near the end of its rate-hiking cycle. INR traded higher against USD as the Reserve Bank of India surprised the market by keeping the repo rate on hold on Thursday after six straight rate hikes.
The high levels on 364 day T-bill auction cut off yields indicate that liquidity is expected to stay tight over the next one year and this does not bode well for the shorter end of the yield curve. However, one year swap yields are not as pessimistic and excess liquidity to ease sooner than later.
The SVB collapse has brought to the fore the risks of government bonds when central banks artificially held down yields to allow governments to borrow heavily. India has seen heavy government borrowing in the last two years when yields were kept low by RBI and banks are invested in g-secs at much higher prices than what they are today.
Inflation is a positive factor in government finances, as it increases tax revenue on higher prices of goods and services and helps in reducing fiscal deficit on the back of higher nominal GDP growth. Does the government really want lower inflation and is RBI fighting a losing battle?
RBI MPC minutes for February suggests that inflation concerns are elevated for the MPC members and there are increasing signs that the policy makers have been way behind the inflation curve. G-sec yields will have to rise and rise fast.
3 month UST yields crossed 5% drawing in flows to USD from other currencies including INR.
Bond markets expect extreme tightness in liquidity till end March 2023 and short end yields are rising fast. Short end yields could spike in the next few weeks on advance tax outflows and year end demand for funds
USD traded higher last week on hawkish Fed commentary which also drives up the bond yields globally. Federal Reserve speakers, including Jerome Powell, have been hawkish this week, reiterating the need to raise interest rate further.
Real interest rate is the spread between inflation and a T-bill or g-sec yield. Real rates have been hugely negative but have since come into positive territory indicating volatility in policy rates. This causes uncertainty in use of capital and also savings tend to come off. RBI has to find a right path and stick to it for a period of time
For FY24, it is expected that the domestic fiscal deficit will be budgeted at 5.5%-6.1% of GDP. Gross market borrowing is expected to stand at around Rs 16 trillion while including SDL borrowing, it is expected to cross Rs 24 trillion for next fiscal year. It can be noted that Rs 4401.29 billion government bonds are to be matured in FY24.
During Dec 22, consumer inflation continued down trend from previous month. Tax collection increased during Apr-Nov 22 as compared to previous fiscal year. Rise in tax collection and fall in inflation are likely to help the Union Government to achieve the fiscal deficit target of 6.4% of GDP for FY23. As the impact of the pandemic has been mitigated, the Government of India is likely to seek fiscal consolidation from here.
USD edged lower last week after data showed U.S. inflation was easing, prompting bets that the Federal Reserve will be less aggressive with rate hikes going forward. India’s CPI inflation falls to 5.72% in December from the 5.88% level seen in November.
10 -year benchmark bond yields rose last week to its highest levels in more than a month on the back of a high CAD that came in at 9 year highs and in anticipation of continued high borrowing expected in the budget for the next fiscal year. The bond market will want higher yields to absorb next years borrowing without losing money.
INR ended 2022 as one of the worst-performing Asian currencies with a fall of 10.14%, its biggest annual decline since 2013. However, last week, USD fell as the market participants are weighing the impact of China's rapid loosening of its strict COVID-19 rules with a surge in new infections.
US Fed hiked interest rate by 50 bps as per expectation with indication of further rate hikes in coming days. It is expected that the fed fund rate will peak in 2023. Will this inversion continue and what does it mean for the gsec yield curve?
RBI hiked rates by 35bps last week and indicated more rate hikes ahead. Bond markets saw g-sec yields rising from lows but are still below highs seen a couple of months ago. OIS yields too are below highs after climbing post RBI policy. Have bond markets already factored in full extent of rate hikes?
Market factors seem to favour a 25bps rate hike by the RBI in its policy review this week but prudence is better than valour and a 5obps rate hike to counter potential inflation and global risk aversion will go a long way in easing market nervousness on future direction of yields.
10-year g-sec yields have come off from highs of 7.50% to trade at levels of 7.3% and market seems comfortable at these levels given that auctions have been going through smoothly at these levels. Inflation, borrowing, government revenues, liquidity, inr and global bond yields indicate stability but risks remain on structural inflation issues.
USD traded under pressure last week following the dovish FOMC minutes released on Wednesday. The market is growing increasingly confident that the Federal Reserve will slow the pace of rate hikes in the December meeting to 50 bps driving UST yields down.
Inflation is showing signs of easing from higher levels but for a longer-term stability of rates, the structural issues of artificially held rates and huge government debt have to be sorted. Central banks have held rates low for too long even as governments have borrowed heavily to support economies for many years now.
Inflation and the sharp backing up of global bond yields have unnerved central banks, governments and investors alike and this will stay for a long period of time as ultra loose monetary policies and high government debt are finally showing the risk of such policies for extended periods of time. Interest rates can settle structurally higher globally.
In a recent development, RBI has scheduled an additional meeting of Monetary Policy on 3rd November in the current scenario of elevated inflations, rupee depreciation and global rate hikes. Will the central bank raise the repo rate beyond 6.5% to cope with global rate hikes?
The sharp rise in 1 year OIS yield and 364 day T-bill yield to 7% levels suggest that RBI will hike the repo rate to 7% in the next 6 months to control inflation and prevent further INR depreciation and also maintain market stability in the face of a global bond crisis.
USD ended the week lower despite rising sharply against major peers tracking US treasury yields higher on Friday. INR rebounded from fresh record lows after touching a psychologically crucial level of Rs 83 a USD during the week
USD is rallying higher across the board in risk-off trade, reflected in a steep selloff in the equity markets. INR ended lower amid broad USD strength and CPI inflation coming at 7.41% in September higher than the 7% seen in August and higher than the expectation of 7.30%.
The g-sec yield curve is flat with 1 year to 40-year bonds all trading in a 50bps to 60bps range from 7% to 7.6%. However, reading into this flat shape tells us nothing of directions of yields going forward. Direction of yields is up given domestic and global factors.
INR on Friday breached yet another psychologically crucial level of Rs 82 per USD on rising crude oil prices and on chances of aggressive rate hikes by the US Federal Reserve that led to a rally in the USD globally. USD was higher on the tight labour market and hawkish commentary from the Federal Reserve officials
INR ended the week lower but gained after RBI hiked rates by 50 bps. USD fell back across the board despite a bout of stronger than expected release of data during the week. GBP rose sharply from record lows hit on Monday after the Bank of England conducted rounds of bond buying to stabilize financial markets.
USD trended higher, boosted by a combination of hawkish Federal Reserve bets and safe haven flows. Global bond yields hit new multi-year highs after global rate hikes. INR along with other emerging market currencies crashed as risk sentiment plunged.
The fast-depreciating INR and tight liquidity conditions along with sharp rate hikes by the RBI to counter Fed rate hikes will push up yields at the short end of the curve and this will take up the 5-year g-sec yield to 8% levels from current levels of 7.4%.
USD rose yesterday after upbeat data boosted expectations that the Federal Reserve will raise interest rates at a faster pace in the coming months. INR fell on the expectation that the Indian current account is expected to widen to a decade high in the April to June quarter.
System liquidity has dropped sharply and is likely to go negative on multiple counts including RBI selling USD, high credit offtake and rising inflation leading to policy tightening. OIS curve has jumped at the short end and g-secs are likely to follow.
India’s forex reserves have dropped by over 15% from peaks to USD 540bn on the back of rising trade deficit and RBI fx sales. However, improved FII inflows into equity and prospects of debt flows on the back of gsecs inclusion in EM bond indices have helped the currency to stabilize.
Bond market depth and liquidity will be major beneficiaries of Gsecs being included in JPM Index, as global interest will come in government and corporate bonds. Bond yields will initially react positively but going forward macro economic factors will prevail.
High inflation is pushing up gst collections and is helping contain fiscal deficit despite higher subsidy outgo on food, fuel and fertilizer. 10 -year g-sec yield has come off on easing worries of higher borrowing but concerns on inflation remain anchored.
USD traded lower last week as U.S. inflation was not as hot as anticipated in July. INR ended the week lower against USD. India’s retail inflation, which is measured by the Consumer Price Index (CPI), eased to a 5-month low of 6.71% in the month of July, down from 7.01% in June.
RBI is still behind the inflation curve with repo rate at just 5.4% against inflation at close to 7% and is in no hurry to raise rates. High inflation brings down relative numbers like fiscal deficit and current account deficit. Bond yields will have to stay high given RBI preference for high inflation.
The government bonds are going to experience the impact of domestic factors such as high inflation, falling rupee, policy rate hikes, higher market borrowing and global factors such as global rate hikes, elevated global inflations in near future.
USD fell last week as the European Central Bank raised interest rates more than expected on Thursday as concerns about runaway inflation trumped worries about growth. INR ended the week marginally higher, helped by falling oil prices and RBI intervention.
INR ended slightly short of Rs 80 a USD mark on Friday after falling to a record low this week amid sell off in riskier assets. USD exhibits broad strength as expectation of more fed rate hikes build after US inflation, as measured by consumer prices rose to 9.1% year on year in June.
The continuing uptrend in wholesale inflation will cause INR to depreciate further. Government bond yields are likely to continue uptrend and the 10yr g-sec yield is expected to cross 8% in coming days.
INR is trading at record lows and RBI governor Shaktikanta Das is underplaying inflation fears and is confident inflation will come off from October 2022. Given this, RBI rate hikes may be much slower than Fed or ECB and this could pull down the INR sharply.
RBI in a statement release states that, “The global outlook is clouded by recession risks. Consequently, high risk aversion has gripped financial markets, producing surges of volatility, sell-offs of risk assets and large spillovers, including flights to safety and safe haven demand for the USD.
As compared to Q1FY23, states of India will borrow double during Q2FY23 than what they did in the same quarter of last year, which may cause State Development Loans (SDL) yields to rise. In addition, possible policy repo rate hike by the RBI will expedite the yield uptrend.
USD is rising on safe-haven flows. The same fears hurting demand for riskier assets are boosting demand for the USD. INR is hovering around its record lows, data showed that Indian factory output grew at the slowest pace in nine months.
The INR weakened last week to close at record lows. Widening CAD, global recession fears, inflation and high fiscal deficit is pulling the INR down. The outlook for the INR is negative and RBI is unlikely to intervene heavily and protect the currency from declining further.
The INR is at record lows and a study of past correlation suggests that g-sec yields will rise on further declines of the INR.
The INR touched record lows against the USD last week on the back of a selloff in equities on worries of stagflation/recession in the US given a flat UST yield curve. INR is likely to touch Rs 80 to the USD on continued sell off in equities.
The continuous rise in inflation in the US and Eurozone at 4-decade highs have spooked currency markets, which are not really finding safety given fall in JPY and rise in Euro against the USD.UST and Eurozone bond yields are rising sharply sending out fresh worries on sustainability if debt of governments.
Inversion in the yield curve where short end bond yields are higher than long end bond yields make investments in short maturity bonds riskier than investments in long maturity bonds. The g-sec yield curve could invert soon on rate hikes and tight liquidity conditions.
The INR is facing weakness due to issues of global central banks tightening policy, capital outflows, widening trade deficit and rising fiscal deficit along with high inflation expectations. In the short term, INR will continue to depreciate but in the longer term, can attract more FDI flows on global outsourcing.
The INR is trading at record lows with weakness on multiple fronts of capital outflows, rising trade deficit, high fiscal deficit and rising inflation. RBI cannot sell USD consistently given that market forces ultimately come out on top.
USD continues to gain as market participants sought shelter in safe-haven assets amid fears of the impact of surging inflation which will prompt US Fed to hike rates aggressively. INR trended at record lows on flight of capital.
Synopsis: The g-sec yield curve has flattened considerably with short end yields rising sharply. This indicates that inflation will push the RBI to raise rates much faster than expected. However, heavy government bond supply will continue to pressure longer end yields giving no respite for bond markets.
INR fell to record lows against the USD last week and RBI had to sell USD to support the INR from falling too fast. Record government borrowing, high inflation and rising global bond yields are driving money out of risk assets. A weak INR with high inflation will force RBI to raise interest rates sharply higher and this can take up 10-year G-sec yield to over 8% levels.
RBI hiked rates in an out of turn policy action last week and g-sec and OIL yields surged with a flattening bias of the yield curve. The rate hike cycle is just beginning and its a long way to go for market stability
Fears over rising inflation, stagflation, and more hawkish central banks are making market sentiment weak and boosting the demand for more safe haven assets. The UST yields back over 3%, and the USD traced yields higher.
US, Eurozone and India CPI inflation are at 8.5%, 7.5% and 7% respectively while 10-year bond yields are at 2.9%, 1% and 7.15%. The Fed and the ECB have a lot of catching up to do on Inflation as they are far behind the curve while RBI is in a better position. This is a strong point for inflows into G-secs.
G-sec auctions are going through smoothly without RBI having to intervene too much to protect bond yields from rising too fast. The bond market is getting good carry and if yields are stable, the carry game will continue.
USD traded higher as it drew support from Federal Reserve Chair Jerome Powell's comments on Thursday that backs a 50-bps tightening at next month's policy meeting, as well as his remarks on a likely consecutive rate hikes this year.
USD rose as high inflation supported the expectation that the Federal Reserve will hike rates more aggressively, possibly with a 50-bps rate hike in May and another in June. This comes after a 25-basis point rate hike in March. India's CPI inflation rose to 6.95% in the month of March which is higher than the 6.07% reported in February.
High and rising inflation expectations, heavy borrowing by government, ultra-low policy rates, all point to a longish rising interest rate cycle where RBI will have to continuously raise rates to bring policy to even neutral levels. Bond markets will play for rising bond yields and investors will have to position their investments for higher interest rates and inflation.
Owing to outcomes of RBI MPC meeting last week, government bond yields soared on multiple market worries. Although the central bank kept repo rate unchanged, it indicated rate hikes in coming months with withdrawal of excess liquidity. RBI’s stance on monetary policy will turn to hawkish from current accommodative..
USD traded higher last week by 1.18% against major world currencies as it was supported by the hawkish federal reserve stance and by robust US service sector data. INR pared losses on Friday when the RBI governor mentioned the intention of withdrawing the accommodative stance.
USD ended the week lower by 0.16% against major peers despite the release of robust U.S. jobs data. Oil prices fell sharply after the US mulled over the possibility of a record release of strategic oil reserves (SPR). Falling oil prices are helping INR to gain ground
USD trades higher last week after Federal Reserve officials have been out in force supporting a more hawkish stance from the US central bank in order to tame elevated inflation. US economic data was also upbeat boosting demand for the USD. INR falls amid elevated oil prices
Market awaits Government borrowing calendar for H1FY23 to be notified by RBI, which will guide direction of g-sec yield movements in coming days. While record amount of Rs 14950 billion as gross borrowing has been budgeted for FY23, around 60% is expected to be borrowed during H1FY23.
The Fed has signalled a tighter monetary policy with rate hikes and balance sheet size reduction on the back of very high US inflation. Bond markets in India will try and guess RBI stance on Fed rate hikes for direction on bond yields. How will RBI react?
USD ended the week lower despite the US Federal Reserve hiking interest rates. The US central bank raised interest rates by 25 basis points in a move that was widely expected by investors. INR rises despite ongoing global economic risks.
USD ended the week higher following the release of US inflation data. The data showed that the cost of living in the US jumped to a fresh 40 year high of 7.9%. This was up from 7.5% recorded in January. INR edges lower as near tern inflation expectations eased, however, this is likely to be short-lived.
In the first half of fiscal 20221-22, RBI held g-sec yields from rising as it coerced markets to absorb government bond supply at lower yields. G-sec yields then started rising in the second half and is at its highest levels at the end of the fiscal year, leaving investors with high losses due to rising yields.
The Fed chair, Jerome Powell, testified last week that rates will start to rise this month, but pace of rate hikes will be slow given the Russia & Ukraine crisis. With inflation at 4-decade highs and interest rates at all time lows, Fed is treading thin waters as commodity prices are surging and US labour markets are very tight leading to high wage growth. Other central banks are facing similar situation and markets are starting to doubt their ability to handle the current crisis.
Safe-haven flows are lifting the USD as the Russian invasion into Ukraine deepens. As well as safe-haven demand the USD is also being supported by strong data and by expectations of the Fed hiking rates this month. INR continues its last-week fall as risk aversion continues to dominate global financial markets.
GOI FRBs should ideally perform well when interest rates are rising but the prices have actually fallen over the last one year. This is due to the absolute yields staying very low as RBI has kept rates low and is continuing its accommodative policy.
USD traded higher last week amid safe-haven flows and further being boosted by upbeat economic data. In the central bank's latest monetary policy report to Congress, the Fed warned inflation could last longer than anticipated should labor shortages and fast-rising wages continue. INR falls as oil prices rise over USD 100 a barrel.
USD ended marginally lower as risk sentiment improved on Friday by the news that the U.S. and Russia were set to discuss the Ukraine crisis next week, raising hopes for a diplomatic solution. Additionally, the minutes from the January Federal Reserve monetary policy meeting were also less hawkish than what was expected, which sent USD lower.
Heavy supply of G-secs and SDLs for fiscal 2022-23 is seeing a huge gap in demand and this will lead to rising g-secs yields or higher inflation if RBI prints money to invest in g-secs.
USD trades higher as soaring inflation boosted expectations that the Fed will look to aggressively raise interest rates across the year. The policy divergence between India and other developed nations is dragging demand for the INR.
Multiple fears gripped bond markets with the government announcing record borrowing in its budget for fiscal 2022-23. Along with record borrowing, Fed rate hikes. Surging oil prices and inflation are unnerving bond markets and RBI needs to address all these concerns in its policy this week.
USD ended the week sharply lower in nearly two years, as the Bank of England (BOE) and European Central Bank (ECB) tightened their monetary policies. Job growth rose far more than expected in January despite surging omicron cases driving 10yr UST yields higher by 11 bps to 1.93% on Friday.
Given expected growth of 13% in fiscal 2022-23 and a fiscal deficit pegged at 6% of GDP, net government borrowing is likely to be at around Rs 7 trillion. Coupled with state government borrowing the supply will still be heavy and RBI will be hard pressed to manage the borrowing if inflation continues to rise.
USD ended the week higher tracing UST yield movement as it touched 1.87% levels during the week amid expectation of a rate hike in March by the Fed. INR ended the week lower amid broad strength exhibited by the USD during the week and as oil prices continue to be at elevated levels.
Fed is sounding alarm on inflation, and this is causing fall in Sensex and Nifty and also rise in gsec yields. INR is also under pressure on FII sales and RBI is likely to raise rates this year even as government increases spending in its budget 2022-23. Bond ladders are the best strategy for investors looking to navigate weakness in equities and rising interest rates.
USD ended the week higher tracing UST yield movement as it touches 1.87% levels during the week amid expectation of a rate hike in March by the Fed. INR ended the week lower amid broad strength exhibited by the USD during the week and as oil prices continue to be at elevated levels.
RBI devolved around 15% of the Rs 130 billion 5 year auction on to the underwriters at over 2 year high levels of 6.07% in the bond auction held last week. Bond markets are nervous on union budget due to rising oil prices and are losing appetite for bonds.
USD lost ground after the producer price index, which measures inflation at the wholesale level rose by less than expected in December. INR ended the week higher tracing domestic equities and amid weakness in USD.
USD ended marginally higher last week after hawkish minutes from the Fed's Dec meeting, released on Thursday, firmed up the expectations that the US central bank could raise interest rates at a faster pace this year. INR ended the week marginally higher after gaining sharply on Friday as USD exihibited broad weakness.
USD fell last week amid growing optimism over the global economic outlook, despite Omicron cases surging. INR traded higher tracing domestic equities higher. The Sensex and the Nifty are pushing higher as risk sentiment continues to improve.
10 year G-sec yield has risen in the year 2021 and has underperformed equities by over 20%. INR has largely remained steady in a Rs 74 to Rs 76 band. Outlook for gsecs is still negative given policy normalisation by central banks amid rising global inflation that threatens to be structural in nature.
USD fell last week amid growing optimism for the global economic outlook despite the surge of Omicron-variant Covid cases. Further, the positive development on the vaccines front boosted the investors' appetite for risk, lifting stocks and pushing U.S. Treasury yields higher.
USD ended the week higher amid talk of interest rate hikes by central banks and concerns about the spread of Omicron cases. Key central banks have adopted different policies as uncertainty about the omicron COVID-19 variant’s impact on economic recovery remains. The Bank of England (BOE), and the European Central Bank (ECB) adopt a hawkish stance.
Fed, BOE and ECB are starting to turn wary of structural high inflation taking hold of economies and are acting accordingly despite Omicron fears on the economy. Gsec yields are trending higher and will stay higher on rising interest rate risk premium.
Federal Reserve (Fed) came out with aggressive bond tapering program (USD 60 billion from January 2022), 3 rate hikes starting from March 2022 and 2 rate hikes in 2023 & 2024 respectively.
USD exihibited high volatility during the week amid increased restrictions in parts of the world to contain the spread of COVID-19, including the new Omicron variant, which tempered investors' appetite for riskier currencies. However, with Omicron concerns easing and inflation at a multi-decade high level, the Fed and the timing of the first-rate hike is back in focus.
Inflation is surging across the world but interest rates are at zero percent levels or even negative in many countries. Central banks have lost the will to fight inflation and are instead watching asset prices move higher and add to inflation expectations. High yield credits benefit while government bonds are at high risk of price erosion.
The safe-haven yen and Swiss franc trade higher on Friday as global equities and bond yields fell on fears about the spread of the Omicron variant of COVID-19, which has resulted in renewed restrictions in parts of the world.
USD is hovering around a 16-month high level amid surging inflation and expectations of a potentially more hawkish Federal Reserve. INR manages to end higher despite broad USD strength as falling oil prices & improving covid numbers offer support.
USD posted its biggest weekly gain in almost three months after a surprisingly strong U.S. inflation data, which prompted market participants to advance their bets for a U.S rate hike. UST yield in tandem with USD rose sharply.
RBI Governor Shaktikanta Das has been given a 3 year extension by the government. In the first 3 years, RBI had to fight a slowing economy and Covid crises and lowered interest rates to record lows. In the next 3 years, will it be a rate reversal?
The 10-year UST yield fell to 1.56% in a volatile session on Friday as the bond market remained unsettled ahead of next week’s Fed meeting. USD traded higher as the Fed preferred inflation measure (PCE) showed prices continuing to rise faster than its 2% target.
USD declined last week despite a steady rise in bond yields, which normally tends to support the currency . The yield on the benchmark 10-year UST has risen by 10 basis points in the course of the week to 1.67%, on fears that this year’s spike in inflation is likely to last longer than first thought.
10-year gsec yields closed at one-year highs last week despite CPI inflation printing at 4.35% for September, after staying well over 5% and 6% levels for a while. Markets are factoring higher inflation with economic recovery and less need for protection of yields by RBI
RBI stopped Gsec purchases in its policy review last week, pushing up yields on government bonds. Gsec yields have been held artificially low by RBI through its bond purchases and market interference and the stopping of G-SAP program will help bond yields normalise to market driven levels.
USD traded higher last week tracing higher UST yields but fell in the later part of the week following an agreement in Washington over the US debt ceiling and amid a huge miss in the US non-farm payroll report. INR ended the week lower as the RBI kept monetary policy unchanged.
India’s macro is looking good and with economic outlook improving rapidly, RBI can easily start to normalise its ultra-loose monetary policy. If done too late, inflation can rise rapidly endangering economic growth.
USD ended the week higher as it traced treasury yields amid expectations that the Fed could start tightening monetary policy sooner than its peers as inflation remained stubbornly high. INR ended the week lower due to the soaring crude oil prices fueling global inflation.
USD & UST yields rose last week as the U.S. Federal Reserve hinted at an earlier-than-expected rate hike. INR ended lower amid broad USD strength and as the Asian Development Bank unnerved investors with a warning on Asia’s economic recovery.
The last time Fed talked about taper and rate hikes, in 2013, the repercussions were severe with INR dropping and bond yields spiking. RBI had to take drastic measures to stabilise the market. Will RBI react more proactively now?
USD traded higher last week after US retail sales defied expectations and rebounded in August. INR ended the week marginally higher after RBI sees the inflation trajectory shifting down more favorably than initially anticipated.
RBI recently stated that the inflation trajectory is shifting down more favorably than initially anticipated. As supply conditions return to normal and productivity gains the bank expects sustained decline in core inflation. This will allow the RBI to maintain its accommodative stance.
USD posted a weekly gain as market participants reassessed the likelihood of the Federal Reserve tapering bond purchases this year. INR ended lower last week in risk-off trade with worries of slowing growth creep in.
The auction of the new 14-year bond maturing in 2035 saw 3x demand for the Rs 100 billion of bonds on offer and the yield cut-off came in bullish at 6.67%. Has the sentiment turned for long-end g-secs that were trading at higher levels for the past many months?
10-year g-sec yield trended down from highs, as the bond-market looked at the GDP growth, tax collections, exports and equity values as highly favorable factors for improvement in government finances.
USD exhibited broad weakness last week after a much weaker than expected U.S. payrolls report that is likely to keep the Federal Reserve at bay in scaling back its massive stimulus measures. INR traded higher last week amid broad USD weakness and as data revealed that the service sector in the Indian economy grew at the fastest pace since the pandemic began.
Fed is going to keep rates down for extended period of time and this is causing asset prices to rise substantially to bubble territory. RBI has plenty to do to manage growth, inflation, capital flows and potential market collapse like in 2008 credit crisis.
Worries over a third wave of covid 19 brought about risk aversion in markets and bond yields declined marginally on global economic growth tapering off. G-sec auction saw demand after a long while.
RBI is now becoming the single largest buyer of government bonds and has bought over Rs 1.5 trillion of bonds till date. However, bond yields have risen as RBI funding government fiscal deficit is seen as inflationary in nature.
USD fell as the concern about the Delta variant is finally catching up to financial assets. INR edged lower as India’s retail inflation cooled in July after pushing above 6% for two consecutive months.
USD and UST yields rose after hawkish comments made by Fed official Richard Clarida and better-than-expected monthly jobs report. INR edged higher largely boosted by an upbeat domestic equity market and inflows towards initial public offerings.
US monthly jobs data came in much better than expected and average hourly earnings rose to 4% from 3.7% as employers were forced to hike wages to attract new workers amid a dearth in labor supply. The trend of rising wages is expected to continue and could keep inflation higher for longer.
Administered pricing of G-secs like small savings rates or even fuel and agri commodities leads to lack of market confidence. RBI needs to let the market determine the yields on benchmark bonds while it goes about setting its policy stance and buying bonds.
10-year benchmark bond, 6.10% 2031 bond, yield rose by 3bps to 6.16% while the 6.57% 2033 bond yield came off sharply by 23bps to 6.65%. The market is starting to play yield curve spreads and this will continue going forward.
USD ended higher for the second consecutive week after a turbulent few days with currencies turning volatile. INR appreciated on firm equity markets following a rebound in risk sentiments and high foreign fund inflows in the primary market.
USD gained while UST and other global benchmark bond yields fell last week on a safe haven demand amid rising Covid-19 cases worldwide. INR showed some resilience against the surging USD last week as better than expected retail inflation helped to calm investors.
USD fell last week amid mixed messages in the FOMC minutes. The benchmark 10-year Treasury yield fell by 7 bps to fresh 4 month lows. INR ended the week marginally higher snapping a 6-weeks losing run despite being under pressure throughout the week amid the release of weak economic data and surging oil prices.
G-sec and SDL yields have moved up sharply from lows in the last one month on market’s fear of inflation and government fiscal deficit. RBI has tried to keep yields optically stable by focusing on benchmark bonds but other parts of the yield curve are cracking.
USD rose across the board last week. U.S. monthly jobs report indicated that the labor market recovery is on the right track but not picking up so fast so as to prompt a sooner move by the Fed. U.S. 10-year treasury yield fell sharply by 9 bps and is currently at 1.43%. INR fell despite exports & foreign exchange reserves hitting record levels
Synopsis: Latest fiscal stimulus will improve the creditworthiness of corporates that are struggling with covid lockdowns but will also pull up inflation. Corporate bonds trading at higher yields can be attractive while gsecs, psu bonds, and AAA corporate bonds may see a rise in yields on inflation.
USD fell last week following dovish commentary from Federal Reserve Chair Jerome Powell. INR fell against USD last week as oil prices hit fresh multi-year highs as the demand outlook continued to improve. S&P Global Ratings cut India’s growth forecast for the current fiscal year to 9.5%.
The 10-year g-sec yield is a reference level for pricing all other bonds and even loans. Global investors base their research and investment decisions based on the 10-year g-sec yield movement.
USD jumped last week against all of the major world currencies and the US 10 year benchmark bond yields posted their biggest one-day rise in three months on Wednesday. The Fed pointed to an improved economic outlook as the reason for accelerating the path to monetary policy normalization.
High CPI inflation and Fed signalling rate hikes are clearly bond price negative, but bond markets saw hardly any price movement in G-secs. Volatility is essential for markets and this lack of volatility is a big worry
US inflation surge in May is prompting the Fed to raise market expectations of rate hikes. However, even with high inflation, rate hikes will start only in 2023. In the meanwhile, Fed will start to taper bond purchases soon before starting to raise rates.
Stronger-than-expected consumer confidence boosts demand for USD ahead of next week’s Federal Reserve monetary policy announcement. U.S. consumer price index jumping 5.0% year-on-year in May, the sharpest rise in 13 years.
The spread of the 30 year bond yield over the 10 year bond yield has risen sharply over the last one year indicating that the market expects inflation to overshoot RBI’s estimates by a wide margin.
USD & UST yields rose sharply after the market reacted to the data which revealed that US inflation surged in April. INR ended the week lower against USD as retail inflation for April weakened to 4.29%.
Month-end flows drove the USD higher against all of the major currencies despite the Federal Reserve’s insistence that more improvements are needed in inflation and employment before balance sheet changes can be considered.
INR depreciated by 0.75% against the USD to touch multi month lows. Factors like surge in covid cases, rise in inflation and rise in oil prices have driven the INR to depreciate. Fear of economic disruption due to lockdown is looming on the back of second wave of corona pandemic.
RBI announced a Gsec acquisition program, G-SAP, for Rs 1 trillion for the current financial year quarter to help the market absorb government borrowing. This can lead to high inflation, hurting bond investors down the line.
RBI monetary policy meeting in the 1st week of April 2021 gains significance as it has to manage a huge government borrowing and also temper fast rising inflation expectations even as covid cases are surging. Will RBI hike rates soon?
USD strengthened against major currencies as market participants bet on fiscal stimulus and aggressive vaccinations which will help the U.S. to grow faster than other economies. INR is under pressure as the covid situation continues to deteriorate.
USD edged higher last week largely helped by rising U.S. Treasury yields even after the Federal Reserve reiterated that it was in no hurry to raise interest rates while predicting strong growth in the world’s largest economy. Reading time 4 minutes.
High government borrowing can cut private sector access to capital making India’s vision of a USD 5 trillion economy not achievable. Individual savings can help absorb the borrowing through realisation of the Gsec market. Reading time- 3 minutes
USD traded lower as inflation missed expectations and jobless claims dropped to the lowest level since the pandemic started. Attention has now turned to this week’s Fed FOMC monetary policy announcement. Reading time 4 minutes.
Rising inflation expectations, spiking UST yields and high government borrowing have taken up bond yields by 40bps to 80bps across the curve. A rate hike in April will send positive signals to the market that RBI is staying on top of inflation. Reading time 4 min
US government bond yields have been rising significantly due to high inflation expectations and this is strengthening the USD on the back of capital moving back to US bonds from other foreign currency assets. Reading time 6 minutes.
USD climbed last week, lifted by a sharp rise in U.S. Treasury yields, while riskier currencies were hit hard amid fears that central banks will have to tighten sooner than previously expected. The yield on the US 10 year treasury closed at 1.41%, its highest level since the start of the pandemic.
USD climbed last week, lifted by a sharp rise in U.S. Treasury yields, while riskier currencies were hit hard amid fears that central banks will have to tighten sooner than previously expected. The yield on the US 10 year treasury closed at 1.41%, its highest level since the start of the pandemic.
Bond markets are increasingly worried about the inflationary effects of fiscal pump-priming by governments and ultra-loose monetary policy by central banks across the globe. Normally, governments want to borrow and spend and are not worried about inflation while central banks act against government-driven inflation. However, due to the covid pandemic, central banks are encouraging governments to borrow and spend and also want inflation to rise.
US 10 year Treasury yield rose to the highest level in a year this week to 1.34% amid concerns about the possibility of higher inflation as investors bet that the U.S. economy will gather strength in the coming months. Additionally, the market participants continue to assess the full impact of Joe Biden’s USD 1.9-trillion stimulus plan.
The G-sec bond auction for Rs 310 billion held last week saw very low demand for bonds and RBI had to devolve more than Rs 200 billion to the bond auction underwriters, close to 70% of the total auction was given to the underwriters. RBI also gave high commission to the underwriters, much more than what they normally pay, in order for the auction to be underwritten.
As per Union Budget-FY22 announcement, Government of India will borrow Rs 2160 billion during Feb & March 2021. Total gross market borrowing stood at Rs 13900 billion during FY21.
USD came under pressure last week as market participants expect that the massive US fiscal stimulus is on its way shortly and amid the release of weak inflation data. The House of Democrats released the first draft text for the legislation that will make up the covid stimulus bill, taking the USD 1.9 trillion package a step closer to approval.
CPI inflation for January 2021 came in at 4.06% while core CPI, which is ex food and fuel, came in at 5.7%. Core CPI is showing broad based inflationary pressures, driven by high fuel and commodity prices and also supply constraints due to high demand for goods and services on the back of government spending. Inflationary pressures are on the higher side and this can hurt bond investors if yields stay low for a longer period of time. CPI inflation for January 2021 came in at 4.06% while core CPI, which is ex food and fuel, came in at 5.7%. Core CPI is showing broad based inflationary pressures, driven by high fuel and commodity prices and also supply constraints due to high demand for goods and services on the back of government spending. Inflationary pressures are on the higher side and this can hurt bond investors if yields stay low for a longer period of time.
INR shrugged off 2 major negative factors to close last week on a stronger note. The government showed a high fiscal deficit in its budget for fiscal 2021-22 while the RBI hiked the CRR of banks to sterilize excess liquidity. Markets focused on the growth optimism on the Indian economy, as it bought into the INR.
RBI hiked the CRR by 1% in its policy review last week, as it sought to slowly normalize policy in the face of higher inflation. Growth prospects are brighter given high government spending and this is signal for inflation to rise. The government forecast a fiscal deficit of 6.8% of GDP for FY22 while it was at a whopping 9.5% of GDP for FY 21.
The Economic Survey 2021 has forecast India real GDP growth at 10% to 11% and nominal GDP growth at 15%, largely due to base effect on the back of negative grpwth seen in fiscal 2020-21 due to Covid pandemic. Trend grpwth after fiscal 2021-22 js seen at 6.5% to 7%. Inflation too is expected at over 6% for fiscal 2021-22. Given that India GDP growth is seen at higher levels while US Fed and ECB keep rates at lows and pump in liquidity, capital flows can be strong and drive up the INR in the near term. However, the cost of growth will drive the INR value over the longer term as high fiscal deficit can lead to higher inflation that might drag sustainability of economic growth.
The bond market can expect a minimum of Rs 7 trillion of net central government borrowing and Rs 7 trillion of state government borrowing for the fiscal year 2021-22. The Union Budget for 2021-22 is expected to be inflationary, as the government spends to push up GDP growth to double digit levels. Assuming that fiscal deficit of center and states is pegged at 5% and 4% of GDP respectively for fiscal 2021-22.
In the last government bond auction conducted on the 22nd of January 2021, the bond market clearly showed its reluctance to bid for bonds at current levels of yields. The 5-year benchmark bond saw the RBI devolving the full auction on to the underwriters, as bids were well above 5.3% levels, almost 40bps higher from lows seen a few months ago. RBI also did not accept any bids for the 10-year benchmark bond, as the market bid at higher levels.
USD saw some stability at lower levels on optimism over the US economy on the back of a new large stimulus package. However, USD has been on a continuous slide over the last 8 months on the back of Fed printing money to nullify the covid impact on markets and economy.
UST yield curve has steepened by around 60 bps over the last few months, with 10-year treasury yields moving by almost 70bps from lows of 0.4% to 1.1% seen in 2020 while the short end of the curve is around .10% levels. The yield curve is showing classical steepening movement on the back of inflation expectations even as the Fed fuels inflation by keeping rates at 0%.
USD was pushed higher against major peers last week following a Democratic win in the Senate elections in the state of Georgia. For the first time in a decade, the Democrats will control the house of representatives, the Senate, and the Presidency in a so-called Blue wave.
Bond yields are treading shallow waters and can become unsustainable at these levels despite RBI protection. The 777 factor will come into play and push up the 10 year government bond yield sharply from current levels of 5.85%. Further the fact that 10 year UST yields crossed 1% levels this year on expected large scale US stimulus will further pressure the 10 year government bond yield.
USD lost ground as US President Donald Trump signed the second stimulus package to support an economy damaged by the pandemic. The relief package is supporting risk assets and is putting pressure on the USD, which used to act as a safe haven during the crisis.
RBI by significantly using its muscle power in the government bond market has sidelined the liquidity providers in the market. Bond traders have almost stopped trading as weekly heavy supply of bonds from the government and states and RBI protecting the yield curve have left them with no appetite to make markets.
USD gained marginally from lows last week as investors turned to the safe-haven asset as many countries tightened restrictive measures against the new mutant COVID-19 virus. However, optimism over COVID-19 vaccines being effective against the new mutant strain of COVID-19 found in the UK boosted the market sentiment.
RBI did not accept any bids in the Rs 90 billion 10-year benchmark bond, the 5.85% 2030 bond, auction held last week. The market bid at yields much higher than the closing levels of 5.93% on the bond and RBI did not want to send signals that it was fine with yield on the bond trending higher.
The 5.85% 2030 bond will see a period of uneasy calm before there is a sudden sharp rise in yields, most probably before budget in February 2021. High government spending coupled with huge liquidity flows will raise inflation expectations sharply and this will prompt markets to reset yields to higher levels.
Safe-haven USD fell against the INR, but it was trading higher versus its major peers on fading hopes for Brexit and U.S. stimulus deals. U.S. lawmakers are expected to pass a one-week spending bill to fund the government, but the House has indicated that anything beyond that would require agreement to a broader fiscal stimulus plan. Unfortunately, little progress has been made and Senate Republicans say they do not have majority support for the current bill. If agreements cannot be reached in the next week or two, there could be a sharp rise in volatility in currency markets.
RBI announced an operation twist for Rs 200 billion as soon as it saw the market bidding at higher yields in the auction of the new 10 year benchmark bond, the 5.85% 2030 bond. The bond yield cut off was at 5.90%, 5bps higher than the last week cut off at 5.85%. Operation twist is where the RBI sells short term bonds and purchases longer term bonds, which helps keep down the 10 year benchmark bond yield.
RBI in its policy review last week said that surging capital flows has led to heavy USD purchases to prevent a sharp appreciation of the INR. USD purchases have led to huge liquidity infusion in the system. Fx reserves are at record highs and RBI fx intervention has resulted in addition of over Rs 2 trillion of liquidity.
RBI is maintaining an ultra-accommodative monetary policy to negate the effects of covid 19 pandemic that has led to 2 consecutive quarters of negative GDP growth in fiscal 2020-21. While growth collapsed, inflation has risen sharply to well over 7% levels, far above the RBI target of 4%. The forecast for inflation is around 5% in the 1st half of fiscal 2021-22 while growth will rebound considerably, largely on base effect. RBI is willing to live with real interest rates of negative 4% for growth to accelerate.
Optimism over a rapid rollout of COVID-19 vaccines, which may result in faster economic recovery across the globe, underpinned the sentiment for emerging-market assets. Owing to this, the safe-haven USD weakened globally and, in turn, supported the Indian currency last week.
The government issued a new 10 year bond, which saw the cut off yield at 5.85%, higher than the 5.77% cut off yield seen in the auction of the previous 10 year benchmark bond, a couple of months ago. The yield of 5.85% is still low as the last time government bond yields went below 6% was in 2008-09 during the global financial crisis. However, the market is showing reluctance to bring down the bond yield despite RBI’s firm commitment to keep down the long bond yields through OMO purchases of around Rs 1.4 trillion including operation twists and SDL purchases.
USD slipped against major world currencies last week, while riskier currencies were trading higher, buoyed by improved risk appetite following COVID-19 vaccine progress and Joe Biden's U.S. election victory. The surge in COVID-19 cases across the US and Congress remains deadlocked over an additional rescue bill h kept the USD from weakening too fast.
Markets took profits on shorts as USD had fallen sharply in anticipation of fresh stimulus by the new US president. This will be temporary given that Fed will pump in money to support the huge fiscal spending by the US government on resurgence of corona virus.
The government a fiscal stimulus package of USD 20 billion as a Diwali gift to the economy in addition to an incentive scheme worth around USD 800 million to revive the covid hit economic growth. The fiscal package comes in the wake of severe stress on government finances as seen by the shortfall in revenues.
Joe Biden winning the US Presidential elections will weaken the USD as the government will float a fresh and huge fiscal package to shore up the covid hit US economy. Fed has indicated continued record low rates and bond purchases, adding huge amounts of USD liquidity into the system.
U.S. election results, Joe Biden presidency checked by a Republican-controlled Senate will lead to USD weakness going ahead. The Democrat is seen pursuing policies conducive to trade and the environment, while a divided Congress may stop him from firing a fiscal bazooka. That means more exports and faster growth for developing nations, as well as a boost for riskier assets from a more accommodative Federal Reserve.
Government bond yields fell marginally last week on the back of RBI OMO purchase auction announcement.
USA Elections 2020 results have not been announced yet. Democratic candidate Joe Biden is leading Republican nominee, President Donald Trump, in terms of electoral votes. Markets are factoring in Biden's Win in USA Election 2020 as he's inching towards the majority of 270 mark.
INR fell against USD across the week in risk off trading. Rising COVID cases across the globe and no US fiscal stimulus have unnerved investors prompting a move out of riskier assets and currencies, such as the INR towards safe havens such as the USD. On the domestic front, expectation of another stimulus package is doing round and that could also weigh on the INR. Market participants are waiting for more clarity on the same and that could keep the volatility in check.
The government, in a surprise announcement, increased the gross borrowing for this fiscal year to Rs 12 trillion from Rs 7.80 trillion budgeted and the 1st half borrowing was increased to Rs 6 trillion from Rs 4.88 trillion.
INR ended the week lower against USD last week despite improvement in the global risk sentiment as RBI bought USD to prevent sharp appreciation of INR. The RBI has stood in the way of INR appreciation for the past couple of months and absorbed most USD inflows of foreign investments into Indian companies and assets. Since the beginning of September, the RBI has added USD 13.69 billion to its foreign exchange reserves, taking it to a record high of USD 555.12 billion as on Oct 16. INR depreciated by 0.35% against the USD last week and depreciated by 1.43% against the euro.
RBI first ever SDL OMO purchase auction of Rs 100 billion saw total amount offered by participants at Rs 154.75 billion, out which Rs 100 billion was accepted. Highest cut off yield stood at 6.68% for 7.95% JAMMU KASHMIR SDL 2030.
The bond market is now absorbing weekly supply, upwards of Rs 300 billion and has been absorbing weekly supply of over Rs 400 billion in the last 6 months. The supply inundation has led to a steep yield curve with the spread of the 1 year tbill to the 10 year bond at levels of over 250bps. SDLs too have seen spreads rise to 85bps from levels of around 60bps despite RBI announcing SDL OMO purchases for the first time ever.
INR ended the week lower against USD last week after IMF forecast that the Indian economy would contract by -10.3% this year after being severely hit by the coronavirus lockdown. However, the IMF was upbeat regarding its recovery saying that India was well placed to start recovering from the crisis with the support from fiscal and monetary policy.
Government of India revised borrowing for Oct 2020- March 2021.To meet GST Compensation Cess shortfall of Rs 1.1 trillion, the Government of India borrowing calendar is extended. For the H2FY21 (from 19th October 2020 to 12th March 2021)
Inflation is much higher than RBI managed interest rates and this can lead to macro economic instability as real negative rates hurts private savings and also leads to currency depreciation that will cause outflows of capital. Low rates at times of rising inflation will lead to excessive debt in the economy as government and corporates get cheap money and this can lead to inflation trending higher.
INR ended the week marginally higher against USD last week amid improvement in the appetite for riskier assets across the globe and due to persistent foreign fund inflows for investments into Indian entities. However, the gain remained capped as RBI intervened in the currency market to avoid sharp INR appreciation. INR appreciated by 0.01% against the USD last week and depreciated by 0.65% against the euro.
Bond markets are now held captive by the RBI, as they cannot express their views on macro economic policies and expectations on inflation. In the short term, bond yields will stay lower, as RBI has taken out the market’s ability to short but in the longer term, the repercussions will be catastrophic if the economy does not recover in a sustained manner.
The government kept to its budgeted borrowing plan for fiscal 2020-21, as it released the 2nd half borrowing program. The borrowing program size was increased in April 2020 on COVID led lockdown. Bond markets were nervous on higher than expected borrowing for the 2nd half but were provided relief by the government.
INR ended the week higher against USD last week as the demand was largely buoyed by foreign investments into a slew of Indian companies. INR appreciated by 0.64% against the USD last week and marginally depreciated by 0.01% against the euro.
RBI sent out two different signals to the bond market last week, confusing traders who were anyway nervous on the 2nd half supply of bonds from the government. In the OMO bond purchase auction, RBI rejected all bids and traders took this as a signal that the central bank did not want to accept bids at lower than market yields.
INR traded lower against the USD last week as the market sentiment weakens amid concerns that a surge in COVID-19 cases may hamper economic recovery. However, INR garnered support from likely foreign fund inflows for initial public offerings of three Indian companies that were open for subscription for foreign investors.
RBI devolved the full auction of the Rs 180 billion benchmark 10 year bond, the 5.77% 2030 bond, on to the Primary Dealers indicating its preference for lower yield cut off in the auction. The devolvement was at levels of 6.02%. This is the second consecutive devolvement for the full auction of Rs 180 billion of the 5.77% 2030 bond, the devolvement was at yields of 6.14% on the 28th of August.
RBI August 2020 policy minutes suggest hawkishness over inflation and possibility of no more rate cuts going forward. Central and state government finances are in a huge fiscal mess and borrowings are set to increase from already high levels. Normally inflation plus heavy bond supply will push up yields sharply to levels where the market is comfortable in absorbing the supply.
RBI, sensing fatigue in the market for government bonds, conducted an operation twist for total purchase and sale of bonds of Rs 200 billion. 10-year benchmark bond yield fell by 5bps after rising by almost 15bps from lows on the back of the RBI operation twist.
RBI August 2020 policy minutes suggest hawkishness over inflation and possibility of no more rate cuts going forward. Central and state government finances are in a huge fiscal mess and borrowings are set to increase from already high levels.
In normal times, high government bond supply and inflation trending at higher than RBI target levels would push up bond yields, as markets would increasing the risk premium on bonds. However, given the pandemic that has led to a steep fall in GDP for the 1st quarter of fiscal 2020-21, RBI is intent on supporting government borrowings at low yields and when markets took up yields by 40bps post release of hawkish RBI August policy minutes, the central bank came out with supportive measures and a strong statement on keeping down yields.
In normal times, high government bond supply and inflation trending at higher than RBI target levels would push up bond yields, as markets would increasing the risk premium on bonds. However, given the pandemic that has led to a steep fall in GDP for the 1st quarter of fiscal 2020-21, RBI is intent on supporting government borrowings at low yields and when markets took up yields by 40bps post-release of hawkish RBI August policy minutes, the central bank came out with supportive measures and a strong statement on keeping down yields.
RBI governor came out with worried statements on market behavior and MPC minutes showed high worries on inflation by members. Given the continued high supply of government bonds and SDLs and with switches that increases supply of long end paper, RBI worries on inflation and markets hit bond yields hard. There is nothing to look forward to for traders, as supply and high inflation rules at present.
RBI devolved around 20% of the new 10 year bond, the 5.77% 2030 bond, on to the primary dealers, indicating its unwillingness to chase the tail. The market was spooked by inflation for July printing at close to 7% levels and cut off yield for the 5.77% 2030 bond in the auction was 5.96%, almost 20bps higher than the yield at which the bond was first auctioned in end July.
RBI kept rates at record lows in its policy review last week and pledged high liquidity and continued accommodative policy given the forecast of negative GDP growth this year. The central bank has kept the door open for more rate cuts. The lack of rate cuts pushed up bond yields marginally across the curve.
RBI policy this week will see no changes in monetary policy given that markets have largely been stable since its June policy. The government issued a new 10 year bond, which saw the auction cut off at 5.77% not very far down from the old 10 year bond yield, the 5.79% 2030 bond that was trading at levels of 5.80%.
The COVID 19 lockdown continued in July across states, placing a question mark on the resumption of business activity in the country. The first few results for the 1st quarter of FY 21 does not look promising with major industry players in the infrastructure, automobile, and other industrial sectors reporting degrowth in the quarter with no optimism on guidance. Agri and to some extent pharma and FMCG sectors have shown traction while the IT sector has shown some sort of stability but no promising outlook on growth.
The spread differential between the new 10 year bond, the 5.79% 2030 bond and the old 10 year bond the 6.45% 2029 bond is at just 9bps. The spread has fallen from over 20bps since the issuance of the new bond. The sharp fall in spread indicates that the market is bullish and is willing to compress the spread for extra yield.
RBI has been aggressively buying USD to prevent an INR appreciation and this is driving down yields across the yield curve. However, short end yields are down sharply with 5*10 segment of the curve spread at 92bps indicating the liquidity effect of fx purchases. RBI has bought USD 35 billion of fx, April to date, and has added Rs 2.2 trillion of liquidity into the system.
RBI, sensing fatigue in the market for government bonds, conducted an operation twist for total purchase and sale of bonds of Rs 200 billion. 10-year benchmark bond yield fell by 5bps after rising by almost 15bps from lows on the back of the RBI operation twist.
Lower global crude oil prices have had an opposite effect on retail fuel prices, with the prices rising by more than 12% over the last one month. The government desperately requires revenues given the economic slowdown on lockdown and is targeting duties from fuel as a source of revenue.
A steepening UST yield curve drove risk appetite higher in global markets, pulling up risk assets.
RBI delivered on rate cuts with the Repo rate at record low levels of 4% and Reverse Repo rate at 3.35%.
INR ended the week lower last week as RBI Governor Shaktikanta Das, in an out-of-schedule monetary policy address announced that the Monetary Policy Committee decided to lower the repo rate by 40 basis points to an all-time low of 4.00% to combat economic risks linked to the COVID-19 pandemic.
INR ended the week marginally lower against USD as market participants were worried about the impact of the coronavirus pandemic on India’s macroeconomic fundamentals after the Centre said it will have to borrow an additional Rs 4.20 trillion in 2020-21.
INR ended the week higher against USD on optimism over the progress in a drug trial for the treatment of COVID-19 and also over the expectation of re-opening of several economies that had come to a halt due to the coronavirus pandemic.
The government is looking at further measures to support the economy that has suffered due to the lockdown, and the total bailout and stimulus coupled with lack of tax collection and other revenues could potentially double the fiscal deficit from targeted 3.5% of GDP.
RBI announced an operation twist, selling 2020-21 maturity bonds and buying bonds maturing in 2026,28,29,30.
RBI in an unscheduled policy announcement cut the reverse repo rate by 25bps, widening the LAF repo-reverse repo corridor to 65bps in order to discourage banks to park excess liquidity with the RBI.
10 year benchmark bond, the 6.45% 2029 bond, saw volatile trading last week, falling by 30bps then rising from lows by 14bps. Bond markets got a whiff of impending rate cuts and took down yields from highs and once RBI announced its rate cuts on Friday, the markets took profits.
RBI, in line with Fed, ECB, BOE, BOJ and other global central banks has commenced bond-buying through OMO purchase auctions to infuse liquidity into the system and also to try and keep surging costs of corporate borrowing down with lower government bond yields. RBI conducted Rs 100 billion OMO purchase auction last week and will be conducting Rs 300 billion of OMO auctions next week.
The impact of corona virus on the economy will prompt RBI to cut rates by at least 50bps to record lows. Bond markets are factoring in steep rate cuts with the 5 year OIS yield trading at 4.77%.
The RBI announced a Bond Switch or Conversion auction for Rs 370 billions scheduled on the 24th of February.
RBI is pumping in money into the markets at cheap rates to encourage banks to lend and also to invest in credit markets.
Despite the improvement in global risk appetite, INR traded lower against the USD last week as market participants remained cautious over the state of the economy after India’s headline inflation surged to an over five-year high of 7.35% in December from 5.54% in the previous month.
The benchmark 10 year government bond is the worst performing asset in calendar year 2017.
INR ended the week lower against the USD amid persistent USD buying by the central bank, along with concerns about India’s weakening growth, crude oil price rise and strain on government’s finances, all of which have led to a view of weakness in the INR.
RBI is buying the 10 year bond and selling short end bonds, an action that is termed as “Operation Twist”. Twist was done by the US Federal Reserve to bring down long term bond yields in order to keep long term interest rates down.
Weak economic data from IIP growth to inflation and trade is hurting sentiments on the government’s fiscal deficit.
INR ended the week lower against the USD after exhibiting volatility during the week amid uncertainty over US-China trade deal, rising crude oil prices, foreign fund outflows and on fears that the RBI may prevent a sharp rise in the INR through its USD buying interventions.
INR ended the week lower against the USD last week, as foreign portfolio investors pulled out funds from domestic assets after the RBI delivered a lower-than-expected cut in the repo rate in its monetary policy meeting on Friday.
The cut off in the auction of a new 10 year benchmark government bond came in at 6.45% and the bond yield trended up by 1bps post cut off to close at 6.46%. The old 10 year benchmark bond, the 7.46% 2029 bond saw yields close at 6.66%, 20bps spread to the 6.45% 2029 bond.
INR ended higher against USD last week amid easing crude oil prices and foreign fund inflows.
ECB lowering deposit rates by 10 bps to negative 50bps and announcing bond purchase program of Euro 20 billion a month will drive central banks across the world from US Fed onwards to cut rates to keep currencies competitive.
INR ended lower against the USD last week, as the appetite for riskier assets worsened amid escalation in trade standoff between the US and China over the weekend. INR was also under additional pressure after a slump in India’s GDP growth for the quarter ended June 2019 weakened the sentiment and affirmed the case of slowdown in global economic growth spilling over to emerging markets.
The release of weak GDP growth data for the1st quarter of fiscal 2019-20, where GDP growth came in at 5%, against full year growth forecasts of around 7%, increased markets expectations of rate cuts by the RBI in its October 2019 policy review.
INR traded higher against the USD last week following positive developments in the US-China trade talks, easing crude oil prices and over RBI’s decision to transfer a record Rs 1.76 trillion dividend and surplus reserves to the government.
The 2 year government bond saw yields at 5.87% levels with strong bids seen in the last auction. However the benchmark 10 year bond has seen yields rise by over 25 bps from lows over the last three weeks on worries of extra borrowing by the government to provide stimulus to the economy.
INR fell to Rs 72-mark against the USD for the first time in 2019, following s selloff in domestic equities and amid weakness in Chinese Yuan, which fell to a fresh 11-year low level. INR depreciated by 0.71% against the USD last week and depreciated by 0.52% against the euro.
The “Noise” surrounding bond markets has increased in volume and this is moving bond yields at present. Bond yields are being jerked up and down on the various factors that are hitting the markets on an almost everyday basis.
INR ended the week lower against the USD amid weak risk appetite.
Currency markets will see high volatility amid the noise surrounding the markets.
The RBI is going into this week’s policy review on the back of global bond yields plunging to fresh lows on Fed rate cut and increased tensions in the US-China trade war, the government calling for large rate cuts to shore up a flagging economy and the bond markets pulling down yields to levels factoring in more accommodation in the form of rate cuts and liquidity.
The bullish case for interest rates is still high and that will keep the 10 year government bond yield down and on a downward path, with bits of volatility here and there. RBI, if it sounds caution on more rate cuts in its August policy meet, can drive up the bond yield sharply.
Rate cut by the RBI in its August policy review is almost certain on the back of the government lowering the fiscal deficit from 3.4% of GDP to 3.3% of GDP for this fiscal year in its budget presented on the 5th of July.
INR ended the week higher against the USD after US Federal Reserve’s monetary policy statement and economic projections raised expectations of a cut in the federal funds target range and spurred foreign fund inflows into domestic financial assets.
Interest rate curves fell sharply last week on the back of multiple positive cues for rates.
Fed rate cut bets pushed down yields on the 10 year UST and also drove down the USD against global majors.
The election victory for the ruling NDA party has taken out political risk from bond markets and also ensures continuity of fiscal policy, as laid out in the interim budget for fiscal 2019-20. Bond yields fell sharply on rate cut hopes and increased liquidity infusion by the RBI.
INR strengthen last week against the USD amid broad weakness in USD and easing crude oil prices. Crude oil prices fell sharply after data released on Thursday showed that US crude stockpiles rose 9.9 million barrels in the week ended Apr 26 to 470.6 million barrels, highest since September 2017.
The Indian rupee saw strong gains last week on hectic FII buying of Indian assets. The currency is aided by dovish Fed and ECB, low domestic and global inflation and speculation on the current government being reelected in the May 2019 polls.
Bond market sentiments are turning distinctly positive with INR strengthening to below Rs 70 to the USD, FIIs turning net buyers of bonds, central banks across the globe turning dovish and RBI buying bonds through OMOs to infuse liquidity into the system.
OIS (Overnight Indexed Swaps) yields fell sharply last week on rate cut optimism.
Bond yields at the short end of the curve turned bullish on rate cut expectations in RBI April policy.
The interim budget for 2019-20 unveiled higher spending by the government on farmers and unorganized workers and tax sops for the middle class, which have led to fiscal deficit being set at 3.4% of GDP, higher than target of 3% of GDP.
The rate cut by the RBI in its policy review last week, saw the markets pulling down yields at the short end of the yield curve with the benchmark 5 year government bond yield falling by 21bps while the 10 year benchmark bond yield fell by just 5bps on a week on week basis.
The INR remained rangebound throughout the week against the USD but ended the week lower as concerns related to fiscal slippage weighed on the sentiment after the interim budget unveiled some big populist measures ahead of the general elections.
The INR posted a second consecutive weekly loss against the USD, largely due to foreign fund outflows, higher crude oil prices, stronger USD and concerns over an expansionary fiscal policy in the upcoming budget.
The government issued a new ten year benchmark bond last week, the 7.26% 2029 bond.
Onion prices have fallen by more than 80% and this is worrying the bond market.
The INR was highly volatile last week but managed to end the week higher against the USD despite USD exhibiting strength mid part of the week against major world currencies largely on the back off easing tensions between the White House and the Federal Reserve. However, tumbling oil prices continued to provide support to INR.
Banks have been beneficiaries of the freeze in credit markets post IL&FS defaults a couple of months back.
Government bond yields fell last week on the back of RBI OMO bond purchases, expectations of a lower CPI inflation print for September 2018, INR rallying from record lows and drop in UST yields from multiyear highs.
The October RBI policy decision of no rate hike was largely determined by the mess caused by IL&FS default.
The bond market has had a difficult period for the whole of this fiscal year with sentiments being hurt by multiple factors of INR depreciation, FII selling, bond supply from centre and states, RBI rate hikes, rising oil prices and even a credit crisis on IL&FS default. Liquidity too has turned structurally negative.
Volatility shifted to credit markets last week on the back of contagion effect of IL&FS default. Yields on DHFL CPs and bonds spiked on Friday as rumors of liquidity issues with the company hit the market
The bond market is hit by negative factors from all sides, falling INR, negative BOP for the 1st quarter of fiscal 2018-19, rising fuel prices, RBI rate hike expectations in October, higher probability of more Fed rate hikes, risk aversion on global trade tensions and impending higher government bond supply starting October 2018.
The first quarter 2018-19 GDP growth at 8.2% is higher than RBI full year forecast of around 7.4%.
The Indian Rupee (INR) breached Rs 71 level against the USD for the first time ever on Friday on the back of a selloff in emerging market currencies gathering pace, month-end demand for the USD from oil importers and rise in crude oil prices.
The INR fell to below Rs 70 to the USD for the first time ever on the 14th of August 2018 and touched an all-time low level of Rs 70.40 to the USD, on the back of Turkish Lira collapse and widening trade deficit.
50bps rate hike will take up bond yields by around 25bps after which yields will stabilise. Overall, bond markets will view the 50bps rate hike as positive as pace of rate hikes can then be easily calibrated going forward removing market uncertainty.
Indian rupee slumped to its lowest-ever close on Thursday at Rs 68.88 against the USD, the previous closing low was the Rs 68.81, on August 28, 2013, when the currency was in a free fall as foreign investors pulled out from emerging markets in what came to be known as the ‘taper tantrum’.
Bond markets are returning to normalcy after three months of high volatility that saw 10 year government bond yields jumping sharply by 80bps from levels of 7.20% seen post RBI April policy meet to multi year high levels of 8%.
Bond markets in India and globally are factoring in policy normalization by central banks. RBI hiked the repo rate in its meeting on the 6th of June while Fed hiked rates for the 2nd time this year in its meeting last week.
The 25bps rate hike by the RBI lowers uncertainty for markets on the timing of the hike. Bond yields are largely factoring in multiple rate hikes and the 25bps rate hike has not moved markets by much.
RBI and the government must calm fears on Banks stability if markets are to trade normally. Fear provides opportunity for traders and investors to buy into higher yields but volatility will be high and one would have to have a strong heart to ride out the volatility.
Bond yields will hover around 7.75% with an inclination to rise but at every higher level of yields, market sentiments will start to change as the market is overly pessimistic at this point of time.
State government borrowings are rising and rising fast. India’s state government borrowing at over Rs 4.07 trillion in fiscal 2017-18, is around 22% of total SDLs outstanding as of fiscal 2016-17, which was at Rs 18548 billion.UDAY bonds outstanding is at Rs 2.08 trillion.
Confused where to invest in the current fixed income environment? Look no further than 3 & 5 year AAA corporate bonds that are looking extremely attractive on the curve. At levels of 7.95% and 8.18% for benchmark 3 & 5 year AAA corporate bonds respectively, spread over repo and spread over the corresponding maturity government bonds offer high returns as well as high margin of safety.
Bond prices tanked again last week, taking 10 year benchmark government bond yields to two year high levels of over 7.75%. Bond yields have been on a sustained rise since October 2017, with yields rising by over 100bps. Bond yields rose to levels of 7.78% last week before paring losses to close at 7.68%.
The bond market is really worried about the absorption of supply of government bonds in fiscal 2018-19. The government is scheduled to borrow a gross of Rs 6.05 trillion and net of Rs 4.62 trillion of dated government bonds.
The bond market is giving good levels for making money over the next 2 months. Bond yields have backed up sharply over a shot spam of time and risk – return is in favour of long rather than short positions.
Indian Rupee depreciated by 0.81% against USD and by 2.45% against Euro.
The Central and State Governments are set to borrow a total of around Rs 11 trillion in fiscal 2018-19. Central government gross borrowing is estimated at Rs 6.4 trillion (Read our note on Fiscal Deficit and Government Borrowing for 2018-19) while states could borrow a gross of Rs 4.6 trillion.
RBI is causing more confusion for markets at a time when there is extreme nervousness. The Central Bank rejected all bids for the 7.73% 2034 bond and the 7.06% 2046 bond in the government bond auction last week. RBI had first rejected bids for the long bonds in the auction on 5th January and then accepted all bids in the auction on 12th January at much higher levels of yields.
The USD is having a very difficult start to the year after weakening by around 10% against a basket of major currencies last year. Economic outlook in other parts of the world, particularly in Europe, has improved, leading to the USD losing its safe haven status.
The government auctioned a new ten year benchmark bond in its bond auction last week. The cut off for the bond came in at 7.17% and post auction cut off, the bond yield fell to 7.09% levels.
The benchmark 10 year government bond, the 6.97% 2027 bond, saw yields close at calendar year highs last week.
Supply creates its own demand when there are expectations of rate cuts or of inflation staying low.
The Rs 2.11 trillion bank recapitalisation plan and the Rs 6.92 trillion road construction plan entails huge supply of bonds.
Stronger-than-expected economic data along with hawkish comments from Federal Reserve officials and sharp fall in Euro after Catalans voted for independence helped to propel the USD sharply higher before the rally fizzled on reports that North Korea could test missiles this weekend.
Indian Rupee fell to 6-month low levels against the USD.
USD remained highly volatile last week but managed to end the week higher against all of the major currencies except for the British pound despite a weaker retail sales report and news that North Korea fired another missile over Japan.
India reported its highest fx reserves at USD 400.7 billion as of 8th September 2017 despite current account deficit jumping to 2.4% of GDP in the 1st qtr of this fiscal year from 0.1% of GDP and 0.6% of GDP in the 1st and 4th quarter of last fiscal year respectively.
USD came under pressure last week on rising tensions between the U.S. and North Korea, a top Federal Reserve official urging caution over further rate increases until the pace of inflation improved and hurricanes causing disaster in the US.
Sliding UST yields and USD is a liquidity headache for RBI.
USD ended the week on a higher note despite weak monthly jobs report.
System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI and drawdown from Standing Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) and MSS bond issuance was in surplus of Rs 4645 billion as of 1st September 2017 from levels of Rs 3437 billion as of 25th August 2017.
USD was volatile last week amid renewed geopolitical tension in the Korean Peninsula and drop in investor expectations of a third rate hike later this year, after Federal Reserve chair Janet Yellen avoided talking about monetary policy in her speech at Jackson Hole.
System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI and drawdown from Standing Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) and MSS bond issuance was in surplus of Rs 3437 billion as of 25th August 2017.
Incremental news and data point to more monetary easing by the RBI in its October 2017 policy review.
The OIS market saw 5 year OIS yields falling by 14bps week on week to close at levels of 6.12%.
RBI will keep the Repo Rate status quo in its bi monthly policy review on the 6th and 7th of June. The MPC (Monetary Policy Committee), which had sounded caution on inflation in the April meet, will remove the “Upside Risks to its CPI Inflation forecast of 4.5% to 5%”, which will be taken positively by the bond markets.
Moody’s Investors Services on Wednesday downgraded China’s long-term local and foreign currency issuer ratings by one notch to A1 from Aa3, citing expectations that the financial strength of the world’s second-biggest economy would erode in the coming years.
The system is facing a glut of liquidity and it is creating problems for the bond market. Liquidity that was in high surplus due to demonetization has been rising despite money going out of the system through currency in circulation, which has risen by Rs 800 billion in the first three weeks of this month.
The INR closed at its highest level in over 18 months at Rs 64.40 to the USD last week.
Government bond yield curve spreads and credit spreads fell last week as the market bought into higher levels of spreads.
State Government Borrowings saw concerns raised by the Monetary Policy Committee (MPC) in their 8th February meeting.
USD closed at 14 year highs last week, largely on the expectations that a fiscal expansion planned by U.S. President-elect Donald Trump will boost inflation and lead to a faster pace of interest rates hikes in 2017.
RBI, against all expectations kept rates status quo in its policy meet on the 6th and 7th of December.
The INR fell to levels last seen in February 2016 on the back of a broad USD strength.
Banks are flooded with deposits post demonetization of Rs 500 and Rs 1000 notes.
Indian bond yields rose during the last one month on the back of supply worries and rise in global bond yields, however our fixed income growth portfolios value stayed stable reflecting the good choice of securities.
Barring the unexpected news that the FBI has re-opened its investigation into Hillary Clinton’s emails case, the past week has been a great one for the USD with Friday’s stronger-than-expected third-quarter GDP report adding fuel to the market’s optimism on the currency.
USD continued to gain against major world currencies for the second consecutive week on heightened expectation for an early Fed rate hike, which was boosted after a string of strong economic data released last week.
Given the domestic and global factors, the yield on the 6.97% 2026 bond is likely to stay ranged with 6.60% levels at the floor and 6.85% at the ceiling. Break out of 6.85% is likely if there is deep global risk aversion while inflation coming in lower than 5% levels for the next few months could see the yield drop below 6.60% levels.
Government bond yields that have trended down by over 75 bps since the Union Budget on 29th February could see pressure at lower levels of yields on the back of Rs 150 billion of weekly auctions for the next two months. Indo-Pak tensions, Deutsche Bank issues and US presidential elections are likely to place pressure on bond yields.
The gsec yield curve has dropped sharply and flattened out over the last six months.
The late Friday sell off in US and European equities and bonds will cast a shadow on the rally in domestic bonds, which has seen the new ten year bond, the 6.97% 2026 bond yield falling by 14bps since issuance on the 2nd of September.
Dr. Urjit Patel is appointed RBI Governor and bond yields will rise in the short term.
Friday’s unambiguously strong nonfarm payrolls report sent the USD soaring against all of the major currencies as it bolstered expectations that the Federal Reserve will raise interest rates as soon as this year.
USD traded lower against most of the major currencies last week, particularly against the Japanese Yen. USD/JPY dropped from JPY 106.30 to below JPY 102 after the Bank of Japan announced a very modest increase in monetary stimulus.
Government bonds continued the post Brexit rally last week with yields falling by 1bps to 7bps across the curve.
Encouraging U.S. economic data, landslide victory for Japan’s ruling coalition, Britain’s easing political uncertainty and Bank of England surprise move of leaving interest rates unchanged were the main drivers for global currencies last week.
Government bond yields fell sharply last week in anticipation of the government announcing a new RBI governor to replace Dr. Raghuram Rajan, who is not taking up a second term.
Bond yields fell sharply last week flattening the 10 over 30 segment of the government bond yield curve.
RBI has announced an OMO bond purchase auction for Rs 150 billion scheduled for the 31st of May 2016.
RBI has bought Rs 400 billion of bonds through three OMO purchase auctions since the beginning of April 2016 and will now have to step up its purchases if it has to fulfill its stated aim of bringing down liquidity to neutral territory.
State Development Loans (SDL’s) have been largely viewed as risk free by markets on the back of RBI managing their borrowing and both the central bank and the government providing overdraft facilities to meet financial obligations.
The government that carried a surplus of Rs 1500 billion into April 2016 has spent its entire surplus and its cash position stands at just around Rs 20 billion as of 22nd April. Government spending its surplus has infused funds into the system improving liquidity conditions.
Japanese Yen last week came under pressure and bounced back from highs after Japan’s Finance Minister Taro Aso said on Tuesday that he would take various measures against excessive currency volatility and added that rapid currency moves are unwelcome.
USD last week was volatile amid weak market sentiments after IMF warning signals.
Emerging market currencies posted the strongest monthly rally after the Fed adopted a gradual approach to its interest rate increase cycle, which has fuelled the optimism in the market that capital inflows to the emerging markets will be sustained.
The spread between the one year OIS (Overnight Index Swap) yield and the one year Bank CD (Certificate of Deposit) yield is extremely attractive and bond markets will look to lower this spread considerably over the next two weeks.
Global central banks effort to depreciate their currencies seems to be failing.
Risk appetite in bond markets that was extremely low prior to 29th February budget 2016-17, has gone up considerably post budget. Bond yields have dropped by 30bps to 40bps in the five to thirty year segment of the government bond yield curve with the curve flattening by around 10bps in the ten over thirty segment of the curve.
Asian currencies were largely up against the USD last week. Australian Dollar appreciated by 4.39%, New Zealand Dollar appreciated by 2.75%, Japanese Yen appreciated by 0.23% against USD and depreciated by 0.45% against Euro, South Korean Won appreciated by 2.88%, Philippines Peso appreciated by 1.12%,
The sharp rise in public debt since 2008-09 has increased focus on debt management strategy of the government as market borrowings in the form of dated government securities and treasury bills constitute around 85% of public debt.
Japanese Yen last week, appreciated by 3.2% against the USD and is currently trading at JPY 113.25, which is below October 2014 levels when the BoJ shocked the markets with a ultra loose monetary policy in order to boost inflation.
On 4th February government of India repurchased Rs 166.49 billion of bonds.Total bids were Rs 533.53 billion.
USD ended last week lower as the market continued to digest Fed’s recent rate hike. Mixed US economic data released last week added volatility to the USD, as it painted a mixed picture of the U.S. economy giving no clues as to how fast the Federal Reserve will raise interest rates next year.
Fed raised its benchmark rate by 25bps in its meeting that ended on the 16th of December 2015.
Indian Rupee depreciated by 0.15% against USD but appreciated by 1.12% against Euro last week.
USD gained last week and touched two month high levels.
USD last week was volatile on rising uncertainty over Fed rate hike this year, in the midst of mixed U.S. economic data. USD Index (DXY), which tracks the movement of the USD against six major currencies, weakened by 0.29% on weekly basis and closed at levels of 94.54.
The INR is set to gain on the back of expected FII flows into equites and bonds.
Asian currencies were largely down against the USD last week. Japanese Yen declined by 0.06% South Korean Won declined by 0.21%, Philippine Peso declined by 0.48%, Indonesian Rupiah declined by 0.68% and Thai Baht declined by 0.31%.
USD declined last week due to mixed U.S. economic data and weak US non-farm payroll report.
USD last week strengthened against major currencies on statement made by Fed chair Janet Yellen suggesting that the Fed expects to start raising interest rates later this year, if the economy continues to improve as expected.
Asian currencies this week were majorly up after weak U.S. economic data and on Fed’s dovish statement but the gains are expected to be short-lived as the Fed sticks to its plan to raise interest rates.
Asian currencies this week also were under pressure due to building up of policy divergence as US labour market is on a strong recovery path making a very strong case for the Fed to hike rates sooner than expected.
USD rallied last week and is expected to strengthen further on strong February monthly US job report, which is indicating a healthy and continuous recovery in US labour markets and is making a strong case for Federal Reserve to hike rates sooner than later.
Indian Rupee advanced to its best level in two-weeks against the USD after Federal Reserve Chairperson Janet Yellen suggested that an US interest rate rise is not likely to occur for some time yet.
The European Central Bank (ECB) on Thursday the 22nd of January 2015, announced that the bank will make monthly purchases of government bonds, asset backed securities and covered bonds for Euro 60 billion (USD 69 billion), starting March 2015 and continue until September 2016.
FIIs have invested around USD 20 billion in INR Bonds in the April-December 2014 period.
The benchmark ten year government bond, the 8.40% 2024 bond could well end the calendar year 2014 at levels of 7.50%.
RBI is likely to deliver 25bps Repo Rate cut on the 2nd of December 2014 policy review.
Ten year bond yields have fallen sharply from the US to Germany over the last one month.
India’s subsidy bill could be well below Budget 2014 estimates of Rs 2478 billion on the back of stable crude oil prices, pass through of diesel prices to the end user and expected cut in food subsidies on FCI reforms.
Bond market is confused by RBI actions on auctions, bond sales and liquidity.
Bond markets are distinctly going bullish into the 3rd June 2014 RBI policy review. The auction of the new 14 year bond on the 30th of May saw cut off coming in at 8.60%, below levels of 8.74% traded in the when issued market.
The five year OIS (Overnight Index Swaps) yield closed last week at four month lows of 8.24%.
The redemption of Rs 407 billion of 7.37% 2014 bond on the 16th of April and the Rs 1970 billion of deposits raised by banks in the last fortnight of March 2014 has led to higher demand for government bonds in the market.
The bond market will eye liquidity conditions in April to take a view on structural changes in the bond yield curves.
Corporate bond yields at the short end of the yield curve fell sharply last week as the market bought into attractive yields at higher levels in anticipation of good system liquidity in April 2014.
Bond traders are not loudly cheering the strength in the INR and the record high levels in the Sensex and Nifty.
The bond market is confused on the intentions of the RBI. The central bank’s official stance is that the Repo is the operational rate for the market but its actions suggest that its holding rates in the Repo-MSF corridor.
RBI could cut the CRR (Cash Reserve Ratio) in its 28th January 2014 policy review to provide liquidity to the banking system.
The positive sentiment in bond markets that has taken down bond yields by 30bps since the beginning of calendar year 2014 is set to continue on the back of RBI OMO bond purchase auctions and the government looking to lower full year budgeted borrowing by Rs 150 billion.
Bond yields are likely to come off on the back of bond positive economic data.
Bond markets are going into New Year 2014 on a nervous note with yield curves shifting higher across segments.
There is heavy congestion in yields in the 9.20% to 9.60% band.
The bond market has to cross many hurdles before it can establish a firm footing.
The date 18th December 2013 has attained high significance for bond markets.
The bond market is going into Diwali 2013 on a pessimistic note.
RBI cut the MSF rate by 50bps, held an Rs 10,000 crores OMO (Open Market Operation) purchase auction and infused Rs 19,000 crores through 7 day term repo auctions at 8.80% to ease system liquidity and bring down rates at the short end of the yield curve.
The improved outlook on the INR did not filter down to bond yields coming off as the market is waiting for the events of Fed FOMC meet and RBI policy review to pass before taking fresh directional positions on bonds.
Bond market will not be too enthusiastic on taking down bond yields despite GDP growth for the first quarter of fiscal 2013-14 coming in at levels of 4.4%, well below official forecast growth levels of 5.5% for the full year.
Bond market is trading the INR not directly but indirectly through government bonds.
The bond market will go into the 30th July RBI policy review on a hopeful note.
Bond markets had the strongest bout of volatility in over four and half years last week.
The better than expected June 2013 job numbers in the US took up ten year US treasury yields by 20bps.
The government approved doubling of domestic gas prices last week and this is largely positive for the bond market.
The auction cut off on the benchmark ten year government bond, the 7.16% 2023 bond, came in at 7.28% levels.
The cut-off on the new ten year benchmark government bond was aggressive at 7.16%.
Bonds markets had one of its best weeks in a long while with sharp fall in bond yields across the curve amidst record high volumes.
The bond market is anxiously waiting for the government to announce an issue of a new ten year bond.
The outlook for liquidity is turning positive and this bodes well for interest rates at the short end of the yield curve. Liquidity conditions are improving on the back of factors such as strong growth in bank deposits and falling trade deficit.
The government bond market is going into the new fiscal year staring 1st April 2013 on a bearish note.
The RBI is expected to cut the benchmark policy rate the repo rate by 25bps in its mid term policy review on the 19th of March. Bond markets are starting to factor in the 25bps repo rate cut in bond yields.
The bond market will take direction from the government borrowing numbers for fiscal 2013-14. The FM will release the gross and net government borrowing numbers for fiscal 2013-14 in the budget presentation on the 28thof February 2013.
Bond market has largely factored in a 25bps repo rate cut in the RBI policy meet on the 29th of January 2013. Ten year benchmark bond yields are down 22bps month to date on rate cut expectations and on improved sentiment on government finances post fuel price decontrol.
Bond market started off 2013 with a bang with rallies in government bonds and corporate bonds.
Liquidity tightened considerably last week with the market borrowing from RBI crossing Rs 170,000 crores.
Bond markets will have to weigh positives of poor IIP and export growth data and lower inflation data with negatives of higher fiscal deficit, tight liquidity conditions and a weakening Rupee for determining the direction of bond yields.
RBI last cut repo rate in April 2012, where the repo rate was cut by 50bps.
The Rs 13,000 crores government bond auction held on Friday the 19th of October saw strong bidding for bonds in the auction by market participants leading to cut offs coming in better than expected.
The government bond market failed to embrace positive talk on policy rate cuts by the RBI.