FIXED INCOME SECURITIES & FINANCIAL INNOVATIONS

Daily Market Analytics of Gsec Spreads for the Week ending 14th January 2012

Presented By Jayalakshmi (10SBCM0025) Vittal K V (10SBCM0305)

 The "yield spread of X over Y" is simply the percentage return on investment (ROI) from financial instrument X minus the percentage return on investment from financial instrument Y (per annum).

When spreads widen between bonds with different quality ratings it implies that the market is factoring more risk of default on lower grade bonds.

For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, the spread between Treasuries and junk bonds is 2%. If that spread widens to 4% (increasing the junk bond yield to 9%), the market is forecasting a greater risk of default which implies a slowing economy. A narrowing of spreads (between bonds of different risk ratings) implies that the market is factoring in less risk (due to an expanding economy).

Jan 9
Indian bond yields fell sharply to 2-month low as hopes of RBI rate cuts were raised after Prime Minister Manmohan Singh said the Indian economy is expected to grow by 7% this financial year despite the adverse impact of global economic slowdown. Also, government bond yields fell sharply week on week (w-o-w) due to expectations of rate cuts by the Reserve Bank of India (RBI).The bond market shrugged off higher supply and took down benchmark yields by 30-35 basis points (bps). The market is factoring in RBI absorbing most of the excess supply of Rs40,000crore through open market operations (OMOs).

Yield on the ten-year benchmark, the 8.79% 2021 bond, fell 36 bps w-o-w to close last week at 8.22%. Yield on the well-traded 9.15% 2024 bond fell 36 bps to close the last week at 8.35%. The yields on these two bonds have come off by 70 bps and 80 bps, respectively from highs seen in the last couple of months.

Jan 10
Federal bond yields edged up on Tuesday due to mild profit taking after aggressive buying in recent sessions, with traders expecting a bond buy back announcement from the central bank later in the day. The 10 year benchmark bond yield settled at 8.23%, up 3 basis points from precious days close and 5 basis points above its intraday low. The RBI is scheduled to auction 140 billion rupees ($2.71billion) of bonds on Friday. The benchmark five-year swap rate was up 9 basis points at 7.15 percent, while the one-year rate rose 6 basis points to 7.80 percent, tracking the move in government bonds.

Also the betting on a buyback announcement later in the day, with borrowings by banks at the central bank's daily repo auction standing way above the RBI's comfort level of about 600 billion rupees. Borrowings by banks from the RBI's repo counter, through which it injects cash into the banking system, rose to 1.1 trillion rupees on Monday, from 923.7 billion rupees on Friday, indicating the shortfall in funds.

Jan 11
Within a hick up in the foreign inflows into the Indian debt markets, cash again tightened in the banking system.

Inflow of $ 1.60 investment resulted in rupee appreciation from 54.24 to 51.75

Surge in equity flow made the rupee appreciate against the dollar Also the opinion of high differential yields between Europe and India in the traders leas to it Traders further said that leading for further tightening of cash without a reduction in CRR will make the yields go down Banks want 6% CRR to release 30,000 Cr rupees into banking system

Jan 12
Indian federal bonds were steady on Thursday despite stronger than expected factory output data, as expectations of rate cuts persisted. Industrial production recovered in November raising to 5.9% from a year earlier. RBI s announcement of debt by bank is likely to check any raise in needs through open market of 120billion rupees Raise in auto sales, infra output brought expectation s on higher yields of debt markets but all the fluctuations are in narrow band Reduction of lock period from 3years to 1year for investment in corporate long term infra bonds Investment of 1.6billion dollar in debt as compared to just 274 million dollars in equity Raising of debt cap on FII seem to under pin debt as a preferred asset for institutional investors RBI deputy Governor Subeer Gokarn on Thursday said that there was no direct link between food inflation and monetary policy, adding that it was relevant only in terms of impact of inflationary expectations

Jan 13
With an expectation that the policy makers will cut the borrowing costs due to the slowed down inflation to the least in the last 2 years, investors are adding holdings to the Govt bonds. This is backed by the factors like real interest rates and investment opportunities in other assets and created an affinity towards Govt bonds. One another factor that might have influenced may be the cost to lock interest rates for the last year which dropped 0.03% point to 7.88% on the day of 15thjan( the next working day). Thats 62 basis points below the Reserve Bank of Indias 8.5 percent repurchase rate. Indian federal bond yields moved in a tight range on thin volume on Friday, as most traders stayed on the sidelines ahead of a $2.7 billion bond auction and buyback, slated later in the day. Total volume on the RBI's electronic trading platform was 31.50 billion rupees ($612.8 million), lower than about 40 billion rupees traded on a normal day.

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