Government Security Market: Update
An outcome of UP election turned positive for the market but the macro data (CPI and WPI) had disappointed the market as CPI surged to 3.65 per cent from 3.17 per cent and WPI to 6.25 per cent but the core number eased from the last month had some relief for the market. Later during the week Fed as anticipated increased their key benchmark rates by 25bps and was dovish on the future course of action. 10 year benchmark moved towards 6.76 per cent from 6.90 per cent in the last week and went back to 6.86 per cent on Friday. The Government of India announced the buy back of the government securities for Rs.3500 crore and in the auction the government accepted only Rs.3061.417 crore. The following securities were bought back by the Government of India.
7.46% GOI 2017 at 100.54
8.07% GOI 2017 at 100.54
7.49% GOI 2017 at 100.10
7.99% GOI 2017 at 100.55
In the weekly Treasury bill auction the cut off for 91 DTB and 364 DTB came at 5.9428 per cent and 6.1853 per cent respectively.
The yield on the 6.97% government bond due Sept. 2026 fell to 6.8603% from last week level of 6.9042% .
Global Debt Market: Update
The Bank of Japan kept its unprecedented monetary easing program unchanged after the Federal Reserve raised its key interest rate, increasing the policy divergence between the two central banks. The BOJ said that it would keep two key rates at current levels and maintain the pace of its asset purchases. With the economy slowly improving and bond yields under control, the BOJ is in position to hold for now. But with the Fed rate hike path putting upward pressure on yields globally, some economists have been looking for signs the BOJ may have to raise its rate targets, particularly if inflation begins to take hold in Japan. The spread between U.S. and Japanese 10-year government bond yields this week reached the widest level since 2010, a key factor behind expectations for dollar strength. A weaker Japanese currency creates desirable inflationary pressures by raising the prices of imported goods, though it can undercut purchasing power for consumers. The Fed’s rate hike isn’t all good news for the BOJ. Further increases in U.S. yields would likely put more upward pressure on those in Japan, which could force the BOJ to increase bond purchases, conduct more fixed-rate buying operations or raise its target for the yield. The US 10 year benchmark yield closed at 2.50 per cent on Friday.
Bond Market Ahead:
With core inflation easing the overall basket of CPI remains under the Reserve Bank of India’s projection of 4 per cent and global oil prices are correcting are going to be positive for the market in the near future as in the last monetary policy review the MPC had cited concern on the global crude oil prices appreciation. The financial year ending will restrict the big movement in the market and the near term range for the 10 year benchmark will be around 6.72 to 6.87 levels. If RBI allow one time shifting of AFS securities to HTM the market will turn positive and 6.67 cannot be ruled out before March ending. After BJP winning with majority in UP the rupee appreciated sharply to 65.45 levels versus USD. If RBI intervene in the currency market the liquidity will infuse into the system which may be inflationary and to manage the liquidity RBI can announce some measure like OMO sale etc post March .
*Advisable to book profit in the range of 6.72/75 levels for the holding position
* Buy 6.97% GOI 2026 around 6.87/88 levels with a target of 6.74 and a stop loss of 6.92 levels .
* Buy T-Bill maturing on March 30, 2017
Yield Outlook for the week
10 year Benchmark 6.97% GOI 2026 likely to move in the range of 6.72% to 6.87% levels.
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