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Bond Market Analysis – 13-Sep-2013

ZCYC and Yield Spreads

ZCYC became flat this week. Long term yield marginally moved up by 18bps whereas short term yield is down by 9bps. Spread across short and long term maturities of ZCYC bonds has decreased.

The benchmark 10-yr security 7.16% GS-2023 closed at 8.50% 13 bps lower w-o-w. The G-Sec market opened stable as the rupee stabilized against the USD.

The ZCYC along with 10-year G-Sec benchmark yield remained stable. There was some marginal movement as rupee appreciated and weakening overseas trend on global crude oil prices. The 10-year G-sec yield kept hovering in the range of 8.40% to 8.50% level as previous week.

There is slight downward shift in AAA bonds’ yield curve. The spread between AAA bond and G-sec yield curve decreased by 60bps for short term maturities. Short term AAA yield fell by 57bps while long term yields remained stable at 9.5%. Spread for long term maturities have decreased due to slight upward shift in G-sec yields.

AAA bonds’ investors recovered losses as yield fell on account of strengthening of rupee against dollar.

Average repo borrowing is seen at Rs.38230 against Rs.39613 crore previous week under Liquidity Adjustment Facility. The Overnight call money rate inched higher and closed to 10.27% CBLO also moved in tandem.

Day $/Rs. Crude($/bbl) Gold($/oz) CPI/WPI(%)
Mon   113.73 1,366.35 5.79%
Tue 63.84 111.25 1,364.10
Wed 63.23 111.5 1,363.90  
Thu 63.55 112.63 1,330.40  
Fri 63.5 111.08 1,314.69
Day Repo R Repo Call CBLO 5 Year 10 Year AAA
  Rs. Cr. %
Tue 40,122.00 48.00 10.26 10.24 8.82 8.49 9.55
Wed 39,359.00 40.00 10.23 10.25 8.88 8.47 9.51
Thu 34,449.00 33.00 10.26 10.25 8.86 8.5 9.57
Fri 38,990.00 8.00 10.27 10.26   8.5  
Day 1M 3M 6M 9M 12M 1M 3M 6M 9M 12M 91D 182D 364D
  CP CD T Bills
Tue           10.62 11 10.62 10.7 10.2 11.26 12.01 9.89
Wed           10.64 10.63 10.65 10.69 10.71 10.66 10.2 9.89
Thu   11.13     10.84 10.67 10.59 10.66 10.69 10.54 10.66 10.2 9.89
Fri 12.47   11.5   11.05 10.72 10.55 10.69 10.71 10.28 10.66 10.2 9.89


The Prime Minister's Economic Advisory Council (PMEAC) slashed the growth forecast for the current financial year to 5.3 per cent from 6.4 per cent projected earlier. According to PMEAC Chairman, India may draw about $9 billion from its foreign exchange reserves to finance its Current Account Deficit.

In July, India's Industrial production grew at a four month high rate of 2.6%. The number comes as a relief because this expansion has been after two straight months of contraction.

The annual consumer price inflation eased in August to 9.52% in line with expectation against 9.64% in the previous month. The corresponding provisional inflation rates for rural and urban areas for August 2013 are 8.93% and 10.32% respectively.

India’s foreign exchange reserves fell by $685.1 million for the week ending September 6 to $274.81 billion. The fall was due to RBI's intervention in the currency market to arrest the rupee depreciation against the dollar.

The rupee has recovered to trade at 63 levels after hitting its life-time low of 68.85 towards August-end. It has jumped 425 paise in five straight sessions starting September 7. Optimism sparked by steps announced by RBI Governor Dr. Raghuram Rajan, who took over on September 4, to rescue the battered financial markets. RBI constituted a 9 member panel to revise and strengthen the monetary policy framework.

India’s August trade deficit dropped 0.7% YoY in August to $37.1 billion on lower gold imports, but partly offset by a strong 17.9% growth in oil imports.  On the other hand, India’s exports were up by 13 tonnes YoY to $26.1 billion showing the highest growth in 22 months. In August, trade deficit further contracted to $10.9 billion.

Yields on benchmark US Treasuries have surged by 1.5% points from lows around 1.6% in May to top 3% for the first time in just over two years. The equivalent British yields have jumped by a similar amount over the same period to just above 3%. German yields rose almost a percent point to top 2% for the first time in 18 months. The sharp moves have come even as major central banks have signalled that official interest rates will stay at record lows at least for the next couple of years.

Brent crude declined this week as talks began in Switzerland to find a solution to the crisis in Syria. Yellow metal prices plunged to multi week lows. US unemployment rate has dropped from 8.1% to 7.3%, as the economy grew with the rate of 2.5% in the second quarter. The Federal Reserve will begin tapering its bond buying program in the next policy meeting. It will soon start to trim its $85 billion of monthly liquidity injections. For India it would mean the fall in currency and continuity of high interest rates leading to further fall in economic expansion.

Discount Bond: A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the secondary market. The "discount" in a discount bond doesn't necessarily mean that investors get a better yield than the market is offering, just a price below par. Depending on the length of time until maturity, zero-coupon bonds can be issued at very large discounts to par, sometimes 50% or more.

Yield Curve: Chart showing bond yields for various tenors

CP: Commercial Paper (short term paper by corporates)

CD: Certificate of Deposit (short term paper by banks/ FIs)

LAF: Liquidity Adjustment Facility by RBI to banks

NDTL: Net Demand and Time Liabilities (Bank CASA and FD)

Repo: Rate at which banks borrow from RBI under LAF

Reverse Repo: Rate at which banks deposit with RBI

OMO: Open Market Operations of RBI to buy/ sell bonds

Disclaimer: This report is for information purpose only. Money Bee Institute Pvt. Ltd. or any of its directors, consultants or employees would not be responsible for decision of investors. As always, please consult your certified financial advisor before investing.