Government Security Market:
Update After the weekly auction result the market rebounded smartly as the traders covers the short position. With the US yield easing the interest for the emerging market bonds is in demand as the spread has widened to more than 500 basis points. The 10 year benchmark managed to close at 7.9028 per cent. In a weekly Treasury Bill auction the Reserve Bank of India sold 91; 182 & 364 DTB at a yield of 6.5219; 6.8869 & 7.1318 per cent respectively. Also sold 2 to 25 year State Loans in the range of 8.18 to 8.45 per cent. Good demand for longer and benchmark papers seen in the weekly auction. The cut off for the securities 6.84% GOI 2022; 7.17% GOI 2028; 7.40% GOI 2035 & 7.72% GOI 2055 came at 7.9339; 7.8934; 8.1204 & 8.1199 per cent respectively.
The yield on the 7.17% government bond due May 2028 rose to 7.9028% from last week level of 7.8189% .
Global Debt Market: Update
U.S. is moving ahead to put tariffs on $34 billion in Chinese goods next Friday. China plans to retaliate with tariffs of its own on U.S. goods and agriculture. Markets are on high alert for any change in course, since this next step in the trade skirmishes opens the door for more escalation. If nobody blinks, or extends the deadline, the market could be volatile. The headlines will hit trading desks that are thinly staffed for the Fourth of July week, and that could cause bigger market waves as a result of light volume. Besides trade, the monthly jobs report next Friday is the big event for the market, which will not be open Wednesday due to the July Fourth holiday. On Monday, there is ISM manufacturing data, and monthly vehicle sales are expected Tuesday. There is also the release Thursday of the minutes from the Fed's last meeting. In the bond market, yields were mostly lower Friday, and a flattening of the yield curve continued to raise red flags as the Fed looks set to hike rates two more times this year and investors worry trade wars will hit the global economy. Traders worry the flattening curve is signaling a weaker economy, since one that is inverted, has reliably signaled recession. The 2-year Treasury yield is the one most driven by Fed policy, and it was higher at 2.52 percent, but the 10-year, reflecting the longer-term outlook, slipped to 2.83 percent. The gap between them was flatter, or narrower at just 31 basis points, the lowest since 2007.
Bond Market Ahead:
In the last week the market corrected from 7.76 to 7.95 level as rupee depreciated and global oil moves up despite OPEC decision to raise 1 million barrel per day. Market likely to keep eye on rupee and oil prices movement and macro data to be released in this month and will also take the clue from the global bond market. If the Reserve Bank of India announced OMO purchase we can see the yield moving down by 10 bps from the current levels. OMO Purchase will support the market and also help in giving the movement to the market.
* Buy 7.17 GOI 2028 around 7.94/95 with a target of 7.85 and a stop loss of 7.99 levels
* Buy 10 Year SDL in auction .
* Buy shorter duration T Bill.
Yield Outlook for the week
10 year Benchmark 7.17% GOI 2028 likely to move in the range of 7.85% to 7.95% levels.
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