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Government Security Market: Update

The Reserve Bank of India, which has been locked in a tussle with bond traders to keep yields anchored near 6 percent, has to cap borrowing costs while managing the government's near-record debt issuance plan. It may raise 1.5 trillion rupees to 1.6 trillion rupees ($20.2 billion - $21.5 billion) from the current 10-year bond. The RBI has auctioned about 1.19 trillion rupees of the current 10-year benchmark note, close to the 1.23 trillion rupees it raised from the previous one. Expectations of further issuance in the current note are also strengthened by the absence of an announcement for a new 10-year bond. The yield on 5.85 percent 2030, the current benchmark, has climbed only three basis points in June, while that on the five-year and 40-year paper has risen 13 basis points and 14 basis points respectively. During the week the fourteen states sold 5 to 35 years of loan in the range of 6.24 to 7.2863 percent. In a weekly Treasury Bill auction the RBI sold 91; 182 & 364 DTB at a yield of 3.4443; 3.72 & 3.8898 percent respectively. Once again the RBI devolved 2026 security on the Primary Dealers at a yield of 5.7246; 4.9251; 6.7433 & 7.1345 percent respectively. The yield on the 5.85% government bond due December 2030 rose to 6.0645% from last week level of 6.0285% .

Global Debt Market: Update

The yield on the benchmark U.S. 10-year Treasury note fell 5 basis points to 1.42% touching its lowest level since June 21. The yield on the U.S. 30-year Treasury bond also slipped 5 basis points to 2.04% as the June jobs report showed a slight increase in the unemployment rate. Job growth leaped higher in June with nonfarm payrolls increasing 850,000, the Labor Department reported Friday. The number was higher than a Dow Jones estimate of 706,000 and better than the upwardly revised 583,000 in May. The unemployment rate, however, rose to 5.9% from 5.8% in the prior month, which came in higher than the 5.6% expectation. Wages were up 0.3% for the month and 3.6% year over year, both in line with expectations. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 120 basis points, less than a basis point lower than Thursday's close. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.7 basis points at 0.2396%.

Bond Market Ahead:

The Reserve Bank of India in consultation with the Primary Dealers reintroducing the Uniform Auction method in the forthcoming auctions for all the segments upto 15 years and longer end bonds continued to be auctioned on the basis of the Multiple Price Method and possibility of introducing the New 10-year benchmark may help in increasing the volume and easing of the yields across the curve by 5 to 10 bps. The RBI may also conduct the OMO Purchase under G-SAP 2.0 in this week or in the following week which will also support the market in easing the supply pressure. The lower global bond yields may be another supportive factor and may create the buying interest in the 4 to 5 years segment which is at an attractive level.

Bond Strategy:

* Buy 6.64 GOI 2035 around 6.71/72 with a target of 6.65 and a stop loss of 6.76 percent.

* Buy 6.22 GOI 2035 around 6.75/76 with a target of 6.69 and a stop loss of 6.80 percent

* Buy 6.67 GOI 2050 around 7.11/12 with a target of 7.04 and a stop loss of 7.16 percen.

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