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Fixed Income And Currency Market

Oct 17th 2021

Gsec yields to only rise from hereon

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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

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Arjun Parthasarathy

Gsec yields close at one-year highs

The benchmark 10-year gsec yield closed at one-year highs of 6.33% last week as markets factored in higher inflation and less need for RBI to support yields. The 10-year gsec yield had touched levels of 5.77% last year at height of pandemic.

Economic recovery is apparent with strong results from corporates leading to record high levels of Sensex and Nifty. Data too is supporting with strong export growth, higher capacity utilization from sectors like cement and automobiles, higher tax collections with GST collections clocking over Rs 1 trillion for many months despite lockdowns and strong capital flows into a growing economy.

The economy is opening up after many months of lockdown and vaccines have reached a large swathe of population in Indian and across the world. A demand led surge is expected for India in the coming months given festive season and good harvest after almost normal monsoons. However there are supply shortages visible with coal output not keeping pace with electricity demand, crude oil prices rising to multiyear highs on restricted supply amid a demand surge, lack of ships and containers leading to logistic blocks. All these will lead to prices rising faster than expected and core inflation will rise. Core inflation for September was higher at 5.99%.

 

RBI is in the process of calibrating liquidity and is stopping its support for yields as bond auctions are going through smoothly and government finances are strong with good tax revenues. RBI will incrementally look to normalise policy given traction in the economy.

Gsec yields have seen lows and trend is up from hereon.

Domestic Inflation-Sep 21

India’s consumer inflation softened to 4.35% in Sep 21 from 5.3% in previous month and 7.27% in Sep 20. Thee fall was due to high base effect. During the month, the inflation in food basket eased significantly to 0.68% from 3.11% in Aug21. Fuel and lights basket inflation stood at 13.63%, transportation and commutation inflation came in at 9.93% while health inflation was at 7.74% during the mentioned month.

India Traded data-Sep 21

India’s merchandise exports increased by 22.63% year-on-year to USD 33.79 billion in September while merchandise import soared by 85% on yearly basis to USD 56.39 billion. Consequently, trade deficit stood at USD 22.59 billion during the month.

Government bonds, SDL and OIS yield movements

During last week, 6.10% 2031 yield rose by 1 bps to 6.33% while 5.85% 2030 yield increased by 4 bps to 6.29%. On the other hand, 5-year benchmark bond, 5.63% 2026 yield declined by 4 bps to 5.67%. 6.64% 2035 yield lost 2 bps to 6.81%. 6.57% 2033 yield rose by 1 bps to 6.70%. Long-term paper, 7.16% 2050 yield remained unchanged at 7.11%

The spread of 10-year bond over 5-year bond rose to 66 bps from 61 bps in previous week.  The 15-year benchmark over 10-year benchmark spread remained unchanged at 37 bps, while 30-year benchmark over 10-year benchmark spread came down by 2 bps to 69 bps on weekly basis.

Average 10-year SDL auction cut-off rose to 7% from 6.90% in previous week while spread rose to 67 bps from 64 bps in previous week.

On weekly basis, 1-year OIS yield rose by 3 bps to 4.05% while 5-year OIS yield decreased by 2 bps to 5.45%.

 

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Disclaimer:
Information herein is believed to be reliable but Arjun Parthasarathy Editor: INRBONDS.com does not warrant its completeness or accuracy. Opinions and estimates are subject to change without notice. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The financial markets are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved. Unauthorized copying, distribution or sale of this publication is strictly prohibited. The author(s) of the content published in the site INRBONDS.com may or may not have investments in the assets discussed in the pages/posts.

Copyright © INRBONDS.com by Arjun Parthasarathy 2021

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