Government Security Market:
Update The 10 year benchmark yield jumped 83 basis points in about five months. In its bi-monthly policy, the Monetary Policy Committee of the Reserve Bank of India urged lenders to reduce funding costs to reflect the previous reduction in policy rates. Since January 2014, the Reserve Bank of India has slashed the policy rate by 200 bps. The mounting concerns over fiscal slippage and a reversal in the systemic liquidity surplus have hardened government bond yields. The benchmark yield jumped to 7.27% in December, the highest in about 17 months. During the week the RBI sold 91; 182 & 364 DTB at a yield of 6.19; 6.3305; 6.4005 per cent respectively. In a weekly scheduled auction the RBI devolved 2024 FRB by 2325 cr on the Primary Dealers at a yield of 6.8435 and sold 6.79 2027; 7.73 2034 & 6.62 2051 at a yield of 7.2646; 7.54 & 7.5401% respectively. The states sold securities in the range of 7.35 to 7.72 per cent.
The yield on the 6.79% government bond due May 2027 rose to 7.2707% from last week level of 7.1351%.
Global Debt Market: Update The most economists, strategists and portfolio managers were expecting moderating growth before the congress passed the tax bill. The tax bill, which is expecting to swell the federal debt by $1trillion to $1.5 trillion over 10 years. It add 0.25% to 0.5% to annual growth in 2018, along with slightly higher inflation a likely fourth Fed rate hike and ultimately higher interest rates, between roughly 2.7% and 3% for the 10 year Treasury by year end 2018. Unemployment is expected to fall below 4% heading towards 3.5%, or lower, which would lift wages and inflation forcing Fed into a more aggressive monetary policy. 10Year Treasury managed to closed at 2.48%.
Bond Market Ahead: Market anticipating fiscal slippage in the current year as the revenue numbers are not in line with expectations and no clarity on the structure of the recapitalization bonds are driving the yield higher and market continue to be under pressure till the release of the borrowing calendar for the next quarter. The government may not borrow extra as they are trying to reduce the expenditure and on the revenue front the divestment will drive around 40000 Crore and the Reserve Bank of India may pass on dividend to the government to the tune of 40000 crore and may see some upstick in the GST collection numbers. Some good buying expected in the last week of December or first week of January from the Provident Fund.
Bond Strategy :
* Buy 6.79 2027 around 7.28/29 with a target of 7.19 and a stop loss of 7.34 levels
* Buy 6.68 2031 around 7.37/39 levels with a target of 7.27 and a stop loss of 7.44 levels .
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