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.
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.
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.
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.
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.
In the second half of fiscal year 2020-21, Union Government will borrow Rs 4340 billion, which is 36.17% of the budgeted borrowing for full fiscal year. During first half, Government has borrowed Rs 7660 billion and net borrowing was at Rs 6354.28 billion.
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 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.
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.
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.
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.
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.
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.
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.
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 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.
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 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.
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.
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 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.
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.
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.
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’.
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.
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 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.
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.
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 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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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%.
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.
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.
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.
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.
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 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.