Government Security Market:
Update India's benchmark 10-year bonds slumped on Thursday after the government set a higherthan-expected fiscal deficit target for the year starting in April. In its budget unveiled earlier in the day, the government said its fiscal deficit would be 3.3 per cent of gross domestic product in 2018/19, higher than market expectations of 3.2 per cent and compared with a previously projected 3.0 per cent. The yield for the benchmark 10-year bond rose to 7.65 per cent after the budget announcement. It had closed at 7.43 per cent on Wednesday. The Reserve Bank of India cancelled a scheduled bond auction on Friday, triggering a relief rally in the bond yields. The central bank did not receive any bid for sovereign bonds worth Rs 11,000 crore, a move that arrested sharp rise in the benchmark bond yields. During the day's trading it shot up to 7.66% but later it pared losses later to close at 7.56. This is the third time since December last week that the central bank has cancelled an auction. During the week the Reserve Bank of India sold State Loan in the range of 7.89 to 8.20 per cent and also sold scheduled 91; 182 & 364 DTB at a yield of 6.3977; 6.5014 & 6.5824 per cent respectively. The yield on the 7.17% government bond due May 2028 rose to 7.5619% from last week level of 7.3066%.
Global Debt Market:
Update While the just-released January employment report showed job growth that topped expectations, to go along with a nice gain in wages, it also sent bond yields soaring. Mortgage rates loosely follow the yield of the 10-year Treasury. Bond yields have been rising for weeks on strong economic data domestically as well as changes in international monetary policy. Nonfarm payrolls grew by 200,000 in January and the unemployment rate was 4.1 percent, while wages saw their biggest jump since the end of the Great Recession. In addition to the solid payroll growth, average hourly earnings were up 0.3 percent for the month, matching estimates and reflecting an annualized gain of 2.9 percent. That was the best since mid-2009 as the two-year economic slump was coming to a close. The 30-year bond got more clearance from the 3 percent level, hitting 3.06 percent, the highest since March 2017. The benchmark 10-year yield rose to 2.83 percent, a four-year high. Traders widely expect the Federal Reserve in March to approve a quarter-point hike in its benchmark interest rate. Federal Reserve is expecting a GDP gain of 5.4 percent in the first quarter, which would be the best increase since the recovery began in mid-2009.
Bond Market Ahead:
After a steep correction on Budget Day the market cooled off to some extent as the regulators shown concern with the rising yield and rejected entire bids for the Friday's scheduled auction and shown interest that the RBI will conduct few OMO purchase to inject some liquidity into the system. OMO purchase can turn out to be a very positive indicator and will help in softening the yield across the curve. Market will be cautious in this week as the RBI -MPC monetary policy review is due on February 6&7. Later in this month the macro indicators CPI / WPI & IIP will give direction to the market.
Bond Strategy :
* Buy 10 year SDL around 8.20 in an auction with a target of 8.12 and a stop loss of 8.25 levels.
* Buy T-Bill for shorter duration. (Source: Bloomberg, GEPL Capital Research).
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