Yields continue upward trajectory, sentiment remains bearish: Edelweiss

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Yields continue upward trajectory, sentiment remains bearish
Government securities
 Sovereign bond remained weak today as market participants trimmed holdings on
expectation of a kneejerk policy rate hike from the central bank in order to rein in
the persistently high inflation. The ten year benchmark yield closed 4bps higher at
8.23%, touching an intraday low of 8.25%. Post release of the food inflation data
in early Jan, the 10 Yr bond yield has risen 28bps discounting the 25bps hike from
the central bank. After market hours RBI announced the auction of INR 110bn to
be held on 21st Jan which will include INR 40bn each of the 7.99% 2017 & 8.08%
2022 bond and INR 30bn of the 8.26% 2027 bond.

 Swap rates also continued their upward momentum due to concerns of the pace of
policy action and the liquidity situation. Post the injection of INR 370 bn into the
system in the past four week, the LAF borrowing has again soared to the INR 1trn
mark today. With no more OMOs expected until the policy review, the liquidity
continues to remain a concern. The comments from the central bank governor
about the soaring inflation also weighed in. The one year and five year swap closed
9bps higher at 7.40% and 7.98% respectively as traders preferred to pay fixed.
Non-SLR market
 Syndicate Bank & Corporation Bank placed INR 5bn and INR 7bn respectively of
early April maturity CD at 9.17%. United Bank placed INR 2.50bn of 20th April
maturity CD at 9.22% while Punjab & Sind Bank placed INR 3.45bn of one year CD
at 9.78%. L & T Finance placed INR 250mn of Feb maturity CP at 7.18%.
Money markets
 Overnight rates closed higher as the demand for funds from bank remained robust
at the beginning of the new reporting cycle. Call rates closed at 6.66% while the
CBLO rates ended around the central bank’s lending rates. Borrowing at the LAF
window also spiked to INR 1trn compared to an average of INR 800bn over the
last fortnight.