Bond street looks cheerful as months of battering finally pauses

The week gone by was an extension of the trend of past several weeks. One thought that Halloween came a bit earlier as the fright for equity and therefore the broader financial markets have been more pronounced than at any time this year. It was risk-off everywhere. Dollar gained across the board with commodity currencies bearing the brunt. A strong US Q3 GDP print may not impact positively it appears. Indian equities continued to be under the hammer, rupee edged closer to 73-mark briefly and bonds getting supported as uncertainty reigns in the corporate bond market.

A bellwether data point, the US GDP data, released on Friday showed US economy expanded at an annualised rate of 3.5%, above consensus estimates and well above recent years’ 2.5% average. The key takeaway was that consumer spending increased at a healthy pace due to a decline in the savings rate and the increase in government spending.

Purists still shrug it off as lacking evidence to a snapback and unless this robust growth becomes a trend, concerns may still remain. The week had its big positive as crude prices slipped after Saudi pledge to increase production. The chartists would be gleeful as prices slipped below the key 200-day moving average (DMA).

European Central Bank (ECB) left rates unchanged and reiterated its commitment to end bond buying programme by December. Italy got downgraded as expected but retains a stable outlook. A crisis averted. Volatility Index, however, remained disconcertingly higher at around 26 indicating volatile times ahead.

Corporate America has delivered good results so far, however, the top line is lower and companies feel they are facing challenges from trade war-related tariffs and headwinds from a rising dollar. The selloff in recent weeks has resulted in derated valuations and Q4 should reflect the sub-par expectations.

Indian markets continued to witness mayhem at the Dalal Street, with the key Nifty index precipitously falling and close to breaching the five-digit level. In a data-light week, one important release showed central government’s fiscal deficit touched 95.3% of its full-year target of Rs 6.24 lakh crore in the first half the current financial year when compared to 91.3% during the same period, last financial year.

Bond street looks cheerful as months of battering finally pauses. Benchmark yield tested 7.84% during the week before profit taking in a risk-averse landscape pushed yields above 7.92%. Sentiment continues to be better and could extend for some more time. The Reserve Bank of India (RBI) announced another open market operations (OMO) calendar which seeks to buy Rs 40,000 crore of bonds in November.

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The act should help to place a lid over the yields and should also be seen as positive from a liquidity perspective. It could also run contra to other recent measures which allow banks to dip into their SLR securities for LCR purposes. Over time, the stock of excess securities could diminish which itself will be a trigger for the second round bond rally. A break below 7.80% would be the first evidence that the rally in bonds could become a short-term trend. 7.80% - 7.90% range for the week ahead with a bias to trade around the lower end of the range.

By: N S Venkatesh

(The writer is a market expert)

Source: DNA Money