the rubber meets the road

http://www.livemint.com/Money/jUWkwFs7GNNvpBM0n1zPeJ/Excess-supply-takes-sheen-offgovernment-bonds.html

rbi -125 bp goi yields -17 bp implies + 108 bp on over supply. lower advance tax collections = greater than expected borrowing. ten year - repo spread (100 bp) many devs above the average. this is before the fed pulls the plug in the bathtub

the rubber meets the road of reality and not rhetoric

Mumbai: The yield on the benchmark 10-year government bond is just 17 basis points (bps) lower than the level seen before the Reserve Bank of India began its rate reductions in January, in part because supply has overtaken demand of gilt-edged securities in the recent past.

This has happened despite the central bank paring its policy rates by 125 bps, the biggest reduction in 11 months since the global financial crisis in 2008.

One basis point is one-hundredth of a percentage point.

Although the benchmark bond fell to as low as 7.51% in response to the rate cuts, it has been rising steadily over the past two months and is around 7.71% now.

“Uncertainties over monsoon until recently, the large supply of bonds through auctions every week and the supply of state bonds have dampened sentiment,” said Soumyajit Niyogi, interest rate strategist at SBI-DFHI Ltd, a primary dealership. “Also, the middle of the curve, on or around 10 years, has not been able to perform as the supply is concentrated in this segment.”

A heavy supply of bonds via weekly auctions under the government’s market borrowing programme is outstripping demand from investors and driving yields up. Bond prices and yields move in opposite directions.

State-run banks, already holding excess securities over and above the required 21.5% of their deposits under the statutory liquidity ratio norm, do not want to buy more bonds. Having exhausted most of their investment limits, foreign portfolio investors are also out of the game. Fresh buying from them will ensue in January as investment limits are opened up further.

Out of the Rs.6 trillion that the government aims to borrow in the year to 31 March, more than 40% or around Rs.2.5 trillion will be from the 10-year segment. All state development loans, as they are called, carry a tenure of 10 years.

In addition to the demand-supply dynamics of the market, bond yields also reflect the broad expectations on inflation and interest rates. The 10-year benchmark bond’s spread over the repurchase rate indicates the premium the government will have to pay its investors considering inflation and rates.

This spread is around 100 bps, which bond traders are terming unnatural. “Even in a bearish market, the spread between the 10-year yield and the repo rate is not as high as 100 bps. But for this to correct, the market needs a trigger and that will be from the US Federal Reserve. Right now there is a lot of uncertainty,” said Ashutosh Khajuria, head of treasury at Federal Bank, a private lender.

Even as the sovereign’s cost of borrowing is inching up, private corporations are better off as corporate bond yields are still soft.

The 10-year corporate bond yield is around 8.25%, about 40 bps lower compared with levels before the rate cuts began. The three-year corporate bond yield, where most of the companies borrow, is still 50 bps down.