Interest rate markets across all tenors danced to the unexpected changes in the Credit Policy, as the RBI cut the Bank Rate by 50 bps to 6.50% and the CRR, by 200 bps (effectively by 80 bps due to the inclusion of the foreign currency deposits as a part of the NDTL) to 5.50% in a phased manner. Call rates, which had shot up last week, traded the week in a 6.50%-7.10% range. Exchange rate continued its rock steady performance in the Rs. 48.05-47.97 / USD range. Forward premia followed the rate cut news to end lower by 15-25 bps across the curve. The forward premia yield curve became upward sloping after almost a month, with the 1month and 1Year implied forward curve differential mean reverting to 50 bps (the average spread in the last 6 months has been 52 bps). The OIS rates ended the week around 40 bps lower than the last week’s closing, approximately shadowing the bank rate cut of 50 bps. The most traded 1Year OIS closed the week at 7.21%, with the 1Year Tbill quoting at 6.90%.
Government Securities
The entire GOI securities yield curve shifted down by 24-26 bps as the Credit Policy cut the Bank rate and CRR rate. The benchmark 10 year yield ended at an all time low of 8.87% s.a., with the entire spectrum now quoting at sub 10.00% s.a. levels. In terms of volatility, this event qualified amongst the most volatile times since January 2001.
* All yields mentioned are annualized and spreads are over annualized GOI Securities.
There was a similar parallel downward shift of 25 bps in the 5 Year liquid AAA segment and of 15 bps in the AA+ segment. Spreads in the 5 Year segment were maintained at 130-135 bps over GOI yields, and at 150-155 bps in the 3 Year segment. The trading volumes shot up to almost 150 cr. daily for the week. Analyzing the trading week, Mutual Funds were sellers, and the trading sections of the market (banks and PDs) were the buyers. This means exit of the investing segment of the market and entry of the trading segment, which could seriously limit any downward movement of yields. However, Liquid Mutual Funds recorded very good inflows, which increased the demand for corporate papers of less than 1 year. Even banks, in anticipation of the next week’s first phase of CRR inflow of Rs. 6000 cr., subscribed to CPs.
The primary CP market recorded very good volumes, as shown in the Table alongside.
In the long term corporate private placement market, TISCO has placed 3 year issue at 9.50% (spread of 234 bps over annl. GOI yields) for Rs. 50 cr. Last week, TISCO had placed Rs. 100 cr. at 8.90% for 1 year, with a private bank. Exim Bank has also placed Rs. 200 cr. with 3 banks in the range of 8.80%-8.90% annl. (124-134 bps over annl. GOI yields). LIC Housing Finance also closed its twin issues of 7years with 5 year P/C at a cut-off of 9.50% and 10 years with 7 year P/C at 10.10%, collecting Rs. 240 cr. However, it retained only Rs. 150 cr.
The coming week should be guided by the expectation of a Repo rate cut and building up of positions for the cash infusion of Rs. 6000 cr. due to the 1st phase of CRR cut. The medium and longer end of the curve should attract much of the trading interest because (I) the shorter end does not have much scope to squeeze rates given that no cuts are expected and (ii) the yield curve is very steep, especially in the 5-10 and 5-15 year segments.
Corporate bond yields are approaching a bottom. Firstly, Investors (mutual funds) were seen exiting the medium / long tenors last week, which was picked up by trading segment. Secondly, as Coporates try to raise money at the current all time lows, supply will increase. Finally, the fear of further credit downgrades would make investors cautious, limiting investments to very few corporates. However, CPs and short term papers should do well as Liquid Funds have received good inflows. Inter-bank short term markets have almost fully discounted the interest rate cuts, except the 1-3 month segment, which is very sensitive to Call rates, and could move down on the actual cash infusion into the banking system. A GOI security auction could be announced, in the 8-15 year segment, as the month end salary payments of the government takes place. The government WMA balances as of 19th October were only Rs. 2502 cr., as against the limit of Rs. 6000 cr. Hence, there is a good cushion assuming no major government flows would have happened last week.
DISCLAIMER
The above views are based on the latest available information. Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. While the views are proffered with the best of intentions, neither the author, nor the firm are liable for any losses that may occur as a result of any action based on the above. The financial markets, and especially the Indian money markets, are illiquid and inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.
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The primary CP market recorded very good volumes, as shown in the Table alongside.
In the long term corporate private placement market, TISCO has placed 3 year issue at 9.50% (spread of 234 bps over annl. GOI yields) for Rs. 50 cr. Last week, TISCO had placed Rs. 100 cr. at 8.90% for 1 year, with a private bank. Exim Bank has also placed Rs. 200 cr. with 3 banks in the range of 8.80%-8.90% annl. (124-134 bps over annl. GOI yields). LIC Housing Finance also closed its twin issues of 7years with 5 year P/C at a cut-off of 9.50% and 10 years with 7 year P/C at 10.10%, collecting Rs. 240 cr. However, it retained only Rs. 150 cr.
The coming week should be guided by the expectation of a Repo rate cut and building up of positions for the cash infusion of Rs. 6000 cr. due to the 1st phase of CRR cut. The medium and longer end of the curve should attract much of the trading interest because (I) the shorter end does not have much scope to squeeze rates given that no cuts are expected and (ii) the yield curve is very steep, especially in the 5-10 and 5-15 year segments.
