US 10Y back to stability
US 10Y Treasury yield spike from 1.85% to 2.35% caused panic and reversal from 2.35% to 2.20% is relief. The spike despite outlook of FED delay on rate hike shift from June to Q4/2015 is attributed to investor risk-on sentiment driving cash from Bonds to equity. All taken, it is in order to expect near term stability around mid-point of short term big picture at 1.85-2.35%. For the week, let us set focus around 2.10% at 2.0-2.25% seen as risk-neutral zone between risk-on equity and risk-off Gilts.
India 10Y bond weak with most cues against
India got the new 10Y bench mark at 7.72% (at 14 bps premium to old 10Y close at 7.86%), which is high against ideal level of 7.55-7.65%. The cues which turned against are India-US 10Y yield spread squeeze from 5.90-6.0% to 5.50-5.60% and risk of next round of Rupee depreciation from 63.20-63.45 to 64.60-64.85 driven by DXY bullish pick-up from 93.00 to 95-96.50. The outlook on domestic interest rate trend is also not positive given the limited bandwidth, excess of supply over demand and low appetite against limited upside when the excess SLR baggage is big. All combined, new 10Y bond coupon at 7.72% at 5.5% spread with US is not bad at all.
For the week, attention will be on RBI rate (and liquidity) action on 2nd June policy review date. The expectation is 50:50 between 25 bps rate cut and pause and near-zero hope on CRR cut. Despite April CPI at sub 5%, RBI is not seen comfortable on sustainability here. More so, the outlook seems to be on build up of downside risks into 5.5-6.0% by end of FY16. Given this outlook against 50-100% probability of FED rate hike between October - December 2015, RBI delivering rate cut at 1.75-2.0% spread between Repo rate and CPI is unlikely; at best, last round of 25 bps cut with caution that rates can move either way in traction with CPI trend. All taken, let us set focus on 7.72% 2025 at 7.65-7.80% and on 8.40% 2024 at 7.80-7.95% in back-and-forth mode. It will not be a surprise as investors lighten the SLR book at lower end in sell-on-recovery mode, while fleet footed traders play for back and forth mode. The risk is from trader's stop-loss trigger and the reward will be from ease in US 10Y yield into lower end of 2.0-2.35% to attract appetite at spread of 5.65-5.70%. The relief will also be from risk-off stance shifting cash from equity to Gilts. All taken, it may not be prudent to chase gains beyond 7.65% (new) and 7.80% (old) and to build strategic book at 7.80-7.85% (old) and 7.95-8.0% (old).
Good luck & have a great week ahead.
Moses Harding
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