Shorter-term debt yields fall to pre-policy levels

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March 2, 2017 4:09 AM

Surging after the RBI’s decision to keep key policy rates unchanged and change its stance on liquidity to ‘neutral’ from ‘accommodative’ earlier, yields on shorter-term debt instruments.

RBI, key policy rates, shorter-term debt instruments, pre-policy levels, FIMMDA, AAA-rated 10-year bonds, Ajay Manglunia, Corporate Bond, Mutual Fund, Share Market, Share liquiditySurging after the RBI’s decision to keep key policy rates unchanged and change its stance on liquidity to ‘neutral’ from ‘accommodative’ earlier, yields on shorter-term debt instruments. (Source: Reuters)

Surging after the Reserve Bank of India’s decision to keep key policy rates unchanged and change its stance on liquidity to ‘neutral’ from ‘accommodative’ earlier, yields on shorter-term debt instruments — those with tenures of one year or less — have declined to around their pre-policy levels, as investors are now looking to take advantage of opportunities at the shorter end of the yield curve.

The one-year government bond yield, which closed at 6.42% on the day of the monetary policy, ended Wednesday’s session at 6.38%. A similar trend could be observed in the movement in yields on commercial papers and corporate bonds with the same tenure, with the former currently 5 basis points lower than its close on the day of the policy and the latter around 10 bps lower.

Moreover, the shorter the tenure, the more pronounced this trend seems to be. According to Bloomberg, the 3-month CP yield, which closed the February 8 session at 6.97%, has now declined to 6.85%. The 2-month CP yield fell by around 12 bps over this period and is currently at 6.75%. Meanwhile, yields on the longer-term instruments have behaved in the exact opposite manner. In the period under review, the 10-year benchmark yield has moved from 6.74% to 6.93%, while the 5-year government bond yield has risen to 6.84% from 6.71% on February 8.

The same could be said about corporate bonds as well, with the Bloomberg FIMMDA India Corporate Bond curve for AAA-rated 10-year bonds showing an increase of 30 basis points over the period, while the curve for shorter-term AAA-rated corporate bonds revealed either unchanged or declining yields when compared to their February 8 closing levels.

“Right now, since there is no expectation of a rate cut in near future and because of the change in RBI’s stance
on liquidity, there is no incentive for any investor to put money in longer tenures. The yield curve is growing steeper and we believe it will continue to do so unless there is any fresh development which will affect the outlook on interest rates,” said Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss.

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On instruments demand for which is the maximum, two dealers working for different banks said most of the buying is happening in the sub-3-year category. In fact, the Bloomberg FIMMDA India Corporate Bond curve for AAA-rated 3-year bonds has actually declined by around 4 basis points since its closing level on the day of the policy to 7.27% on Wednesday. Yields on AAA-rated one-year bonds have actually declined by close to 10 bps over this period.

“If you see the where the call rate is at this moment, you will see it is actually below the RBI overnight rate. In my opinion, the money curve is being affected by factors different to those affecting the bond curve. The bond market has priced in the change in RBI’s stance on liquidity, which essentially indicated that there would be no more rate cuts in the immediate future, while the money market is being driven by excess liquidity in the system,” said R Sivakumar, head of the fixed income at Axis Mutual Fund.

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