Bond/OIS market
10Y bond yield is down below 8.75% on expectations of CRR cut and RBI’s shift of priority from inflation to addressing the immediate needs of maintaining adequate system liquidity at affordable cost to cut its impact on growth momentum. The negative factors discussed in detail in earlier reports continue to stay valid. RBI’s aggressive stance on OMO and FII’s interest on bond auction has also helped in release of pressure on the bond market. Let us now watch 10Y at 8.60-8.85%. The strategy to stay invested in 1Y bond above 8.85% and 10Y bond around 9% has proved good. Let us “carry” these investments for CRR and/or rate cut or for extended gains into 8.60-8.50% where it would make sense to exit.
OIS rates have started its move into the set near term objectives at 7.90% and 7.10% respectively. No change in view while 8.10% and 7.35% holds. Let us watch 1Y at 7.85-8.10% and 5Y at 7.10-7.35%.
FX premium
The release of dollar liquidity squeeze has pushed 3M premium into over 5% and 12M into over 3.5%. Our 3X12M strategy has worked out well as we have seen a good bounce from our pay level of 2.5-2.25% into 3.0-3.25%. Let us unwind part of the paid book at current and look to reinstate on pull back into 2.75-2.5%. Over all, we watch 3X12M at 2.5-3.5% and break either-way not expected to sustain.
Moses Harding
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