Fixed Income Market Update – Nov 2017

Fixed Income Market Update: November 2017 

  • During the month, while money market rates remained benign, gilt and corporate bond yields rose on the back of rise in crude oil prices, global bond yields, OMO sales and waning rate cut expectations. 
  • The ten year gilt benchmark closed the month at 7.05%, 20 bps higher from previous month. The ten year AAA Corporate bond benchmark closed at 7.83%, 15 bps higher than previous month. The five year AAA corporate bond benchmark closed at 7.44%, 13 bps higher as compared to previous month. Ten yr SDL spreads contracted to be in a range of 60 bps to the ten year gilt benchmark. 
  • 1 year CD rates closed at 6.62%, 5 bps higher than previous month. 1 year T bill yield closed 5 bps higher at 6.27%. 3 month CD rates closed at 6.21% and 3 month T bill yields rose marginally to 6.12%. 
  • Brent Crude oil prices rose further during the month to USD 62.78 per barrel on improving demand forecast and extension of supply cuts by OPEC. INR appreciated and closed the month at 64.46 as compared to 64.74 the previous month. For the month of November, FIIs turned net sellers in the debt market to the tune of Rs 1,144 cr. India’s October trade deficit printed at USD 14 bn as compared to USD 8.98 bn in Sept 2017. 
  • The ten year benchmark US treasury yield rose by 3 bps to 2.40 as economic data in the US continued to signal growth recovery. 
  • October WPI data release came at 3.59% as compared to 2.6% in previous month. CPI for October came at 3.58% compared to 3.28% in previous month. 
  • Sept Industrial production (IIP) growth came at 3.8% compared to 4.5% for previous month. Core Industries registered a growth of 4.66% in October 2017. 
  • Banking system liquidity remained in surplus mode though it steadily declined. RBI conducted Rs. 10,000 cr worth of OMOs of dated g-secs, cancelling a subsequent Rs 10000 cr announced one. Banks lent on an average Rs 73,825 Cr at various RBI liquidity facilities put together. 
  • The Centre’s fiscal deficit rose to Rs 5.25 lakh crore or 96 per cent of the Budget target between April and October 2017. 
  • During the month Credit Rating agency Moody’s upgraded India’s sovereign rating from Baa3 to Baa2. The upgrade comes after 13 years. Later during the month on a review S&P kept its rating on India unchanged at BBB- with stable outlook. 

Fixed income market outlook: 

  • Banking system expected liquidity to remain in surplus zone, however the quantum of surplus is expected to be lower than previous month and in a range of Rs 20,000 cr to 30,000 cr. 
  • Short term Money market rates are expected to remain stable with an upward bias as liquidity tightens further. 
  • The ten year benchmark may trade in a range of 6.90% to 7.15% in the near term due to supply and fiscal concerns. However as absolute yields look attractive intermittent buying may emerge. The Dec US FOMC meeting will be watched as Fed is expected to hike key rates by 25 bps. 

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