Wednesday, May 6, 2009

[Investors Please Listen] Bond Vector - Benchmark yield down 15bps (low of 6.22%) on RBI's excess cash rejection

Benchmark yield down 15bps (low of 6.22%) on RBI's excess cash rejection

n               Sovereign yields partially erased yesterday's losses after RBI on May 4 rejected 7.4% (INR 57.5 bn) of the bids received under second LAF (INR 7.2 bn worth bids rejected today). While the RBI is expected to have done it on account of dearth of SLR stock, participants took it as a bullish signal and bought aggressively today.

n               The benchmark opened on a bullish tone with a gap down of 9bps from previous close. It further extended its rally as it fell to touch an intra-day low of 6.224% before closing at 6.30% for the day. Volumes continued to be concentrated in the liquid segment of the yield curve; 10 and 5-year papers attracting 72% of the total traded volume.

n               The banking system continues to cherish bumper liquidity; with cash rich vaults of participants the CBLO rate dipped to 0.01%. Banks continued to channelize surplus funds in the higher yielding reverse repo window. With a flurry of bids in reverse repo, the apex bank was left with limited option but to partially reject bids received in the second LAF; RBI has accepted bids worth INR 259.87 bn (bids received – INR 332.45 bn) taking total funds parked in reverse repo to INR  1.4 tn.

n               While liquidity in the banking system is buoyant, the central government is starved for cash. After borrowing INR 404.12 bn under WMA from RBI, the central bank provided further aid by de-sequestering INR 280 bn of MSS bonds on May 2, 2009.

n               As opposed to short-term non-SLR rate which eased significantly (on plush liquidity condition), the corporate bonds continued to witness stickiness at current levels. Despite extending the closing date, PFC's primary issue in three and five-year segments failed to attract investors' interest. REC is also expected to explore the primary market to raise funds (~INR 5 bn) in 5 and 10-year segments.
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