n The government bond market witnessed a dramatic reversal today with the biggest event of the financial year—Union Budget 2009-10—catching the market on the wrong foot when the borrowings announcement by the FM stood way off market expectations. The actual additional borrowings were at INR ~900 bn relative to estimates of INR 300-400 bn.
n With total volumes at a massive INR 120.20 bn, participants were seen offloading their stocks, inducing bond yields to soar to 20-day high. Yield on the most liquid five-year counter (6.07% GoI 2014) rose 22bps, trading in range of 6.19-6.58% before closing at 6.45%, while the next in line 7.94% GoI 2021 closed 25bps higher at 7.25%; both the tenders contributed 57% to volumes.
n Liquidity in the system has continued to remain plush (barring a week of sub-1 tn volumes under the reverse repo) with excess cash of the banking system holding firm at INR 1.28 tn. Total overnight money market volumes closed at INR 765 bn, mutual funds lending at a rate 207bps higher (2.83%) than Friday.
n With the five-year sovereign paper taking most of the beating for being the most traded counter, its corporate counterpart too witnessed distinctly higher bearishness. Yield on PFC's five-year paper rose 20bps from Friday's level to close at 8.10%. The 10-year bond also trailed weak; its yield rising 12bps to close at 8.62%. Short term money market rates, however, were largely unchanged.
n The finance secretary, to support market sentiment in response to the flared bond supplies, has stated a case for the borrowings to be backed by RBI by way of open market operations, likely to finance half the additional borrowings.
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