In the month of March, debt markets remained weak due to tight liquidity conditions. The pressure however eased off in the last weak due to expectations of liquidity easing in the month of April. The money market rates had spiked up at the shorter end of the yield curve amidst tight liquidity and year-end pressures in the initial half of the month. In the last week, they eased off substantially with 3 months Bank CD rates crashing by nearly 50 bps on the back of improvement in liquidity conditions. At the longer end of the curve, yields on the 10 year benchmark traded at 8.02% before easing to 7.99% in the month end due to higher SLR demand from banks and lower borrowing number.
With tight liquidity conditions at the shorter end of the curve and expectations of being in the last leg of the rate hike cycle, the yield curve had become flattish in nature. The fact that the system remained in negative liquidity throughout the month added to the flattish nature. However once the liquidity situation eased in the month of April, the curve steeped a bit as short term rates eased off their highs. The government announced the borrowing calendar schedule for the first half of the month which stated that it would borrow only Rs. 250000 crores (~ 60% of the gross borrowings) in the first half. This number was below the market expectation and hence it led to a rally at the longer end too. Corporate Bond Spreads had widened substantially in the month of March 2011. At the month end, they traded above 100 bps on both the 5 Year & the 10 Year. However, the movement was more because of the fall in G-Sec yields. A smaller borrowing number, lower fiscal deficit target and higher SLR demand from banks for 2012 accounted for this fall in yields.
In the primary market, 1 year Bank CDs were dealt in the range of 9.65%-10.20% during March whereas 3 months Bank CDs traded in the broad range of 9.55% to 10.20%. Activity in the corporate debt market was relatively muted as indicated by the average daily volume on the NSE WDM segment which stood at Rs. 2,017 crores in March as against Rs. 1,837 crores in February. Credit spread in the 10 year segment widened to 110 bps from 103 bps seen in the beginning of March mainly on the back of fall in the govt. bond yields. Yield on the corporate bond had remained in a narrow band due to lower volumes in the segment.
Outlook
The fate of the Debt market lies on the tone of RBI and the policy actions. We believe that liquidity should ease off in the month of April due to government spending and as year-end pressures ease off. However, economic events that need to be watched out in the near future include the quantum of liquidity easing and the inflation & IIP numbers. To take advantage of the expected liquidity easing, clients are advised to invest in Short Term Funds which would yield attractive returns for a tenor of 6 months. Part exposure can be taken to Gilt Funds at levels above 8.05% on the 10 year.