Sunday, February 02, 2014

See-saw January for India GSec

India bonds had a see-saw of a January with yields moving from 8.80% to 8.47% and back to 8.87%. Variety of factors contributed to this wild swing:
  • Return of FII into the Debt market segment
    • The first half of the month saw inflow from FIIs - mostly into the T-Bill segment so much so that they utilized about 90% of their allotted USD 5.5 Billion quota.  We have not seen such high utilization of any segment of the debt market since May 2013.  With T-Bill segment close to the brim, it was only natural for the market to believe any incremental money would have to go to the longer tenor segments.
  • Surprises in CPI and WPI prints 
    • Both CPI and WPI for the month of December surprised the market on the downside; CPI print came sub 10% at 9.87% - sharply lower than the  11.24% of November. Similarly, WPI saw a downtick of close to 135 bps at 6.16% against prior print of 7.50% and market expectations of close to 7%.
  • Cancellation of an Auction
    • Along with the renewed FII interest in the new year and the positive momentum set by lower inflation prints, RBI/Government cancelled the G-Sec auction of third week of January triggering a break of 8.70%.
  • OMO announcement and Incremental Repo
    • As if the bullish momentum set by the FII interest, Lower inflation prints and Auction Cancellation are not enough, RBI announced a surprise OMO which confounded many in the market given that its announcement came just a day before another liquidity infusion announcement via 28 day term repo. This segment of the month can be called the 'exuberant' moments of the month with sections of the market calling for a 8% target for the 10Y benchmark citing the supply-demand dynamics for the quarter. 10Y benchmark touched 8.47% intraday.
  • Debt Switch
    • The bullish momentum and the exuberance were halted by the announcement of debt switch programme by market 'sources'.  Most market participants did not expect the Government to do debt switch (wherein they buy short term bonds and sell longer term bonds) when the 10-14Y segment of the yield curve is above 9%. With all the bullishness of the month so far, suddenly the debt switch became a credible story which the market believed and began to add caution to their bullish trades.
  • Urjit Patel Committee Report
    • Next was the release of the much awaited, much dreaded report on changes in the way monetary policy is conducted in India including: CPI targeting, formation of monetary policy committee, Term repo as preferred liquidity tool etc.  This report set the cat among the pigeons as to what could be RBI's intent going ahead. Bond yields saw a retracement of close to 50% of the month's move (back to 8.65-67 levels) as an after-effect of this single report.
  • Fragile Five
    • EM currencies came under attack with Argentinian Peso, Turkish Lira, South African Rand all seeing a mini-run in the Forex market; this accelerated the FII debt outflow from Indian markets as well. 
  • RBI hiking rates
    • To top it off the madness of the month, RBI gave the final stroke by hiking rates contrary to market expectations. This completed the bond yields' swing for the month taking it back to where it all started.
Looking ahead: With debt supply coming to an end after next week's auction - the supply demand dynamics should again start getting focus as passive Investors like Insurance companies (LIC has recorded a 32% increase in premium collections this financial year - see Link), Provident Funds will have to buy G-Secs as prudentially stipulated.  The biggest risk to this view would be if the Government announces additional auction.  With a sharp pull back and investor interest close to 8.85% in 10Y as seen on Friday, I would put my bets on long side at 8.80% for a move towards 8.70%. 

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