Weekly Interest Rate Future Curve - December 15, 2014 ::Edelweiss, link

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Market Recap

• India`s benchmark 10-Year yield continued its downward trajectory last week, falling to 17-month low of 7.82% before closing at 7.84% on Friday. Last week, bond market opened with a positive bias, with the 10-year yield continuing its descent as global crude oil basket (Nymex currently below $60 a barrel) extended its recent sharp fall, weighing on global 10-year benchmark bond yields amid expectations of further downward pressure on inflation
• Weakness in the rupee against the US dollar persisted but the domestic currency remains in better shape against most of the EM currencies on improved macro-economic scenario. Post market close on Friday, data showed weaker-than-expected October IIP, likely putting pressure on RBI to cut interest rates earlier than expected to spur growth in the industry sector. IIP (Index of Industrial Production) growth for Oct 2014 was negative 4.2% with manufacturing growth at negative 7.6% while CPI (Consumer Price Index) for Nov. 2014 printed at 4.38%, the lowest on record
• Globally, economic growth is uneven with only US showing signs of steady revival even as deflation expectations are deepening across the other developed countries. Fall in crude oil is a positive but that too is in part due to slack in demand as Eurozone, China, Japan and EMs (Brazil and Russia) witness sluggish recovery

Outlook

• Outlook for the 10-year benchmark bond is looking positive for this week and coming month post RBI`s dovish guidance on rates and inflation. But, a positive US dollar against DM and EM currencies will keep outsized gains in yield in check. Weak Indian Rupee (which is down by 1% for the past week) post disappointing October IIP data and weak global equity indices could force FIIs to shift their investment from EMs to US on mounting expectations of an earlier-than-anticipated rate hike by Federal Reserve. If that happens, it will put pressure on India`s 10-year yield going forward
• Better liquidity conditions is helping the short term yield to continue its downward trajectory besides making the yield curve to steepen further. But, excessive fall in 10-year benchmark bond yield and inflated bonds might likely unwind due to upcoming Christmas holidays

LINK
https://www.edelweiss.in/research/Weekly-Interest-Rate-Future-Curve--December-15,-2014/10005313.html