Weekly Interest Rate Future Curve - January 12, 2015 :: Edelweiss

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Market Recap

• Strong domestic currency, uncertainty over rate hike by Federal Reserve and capital inflows into local debt kept the benchmark 10-year bond yield trading in downward trajectory. The rupee last week outperformed the major EM currency basket after FOMC seemed uncertain over raising interest rates amid concern over their inflation target which is likely to be subdued due to weakness in crude oil. Weak WTI crude oil is favorable for the Indian macros as it narrows the CAD that has been a key positive for the 10 year G-sec bond yield.
• The 10-year benchmark bond yield closed last Friday at 7.84% against the previous week’s close of 7.87%. Yields on the 10-year AAA corporate bonds also closed 4 bps down at 8.55%. Strong buying was seen in both G-sec and Corporate bonds as post New Year holidays FIIs returned to the markets. The Indian rupee witnessed a strong positive bias last week, supporting strong buying in the 10-year paper.
• US non-farm payroll jobs increased by 252,000 in December 2014, higher than expectations of 240,000. The US Dollar index ,which tracks the movement of the greenback against six top global currencies, rose by 0.9% last week. On a yearly basis, the dollar index is up by 13.5%

Outlook

• Outlook for the 10-year G-sec yield is looking positive but all eyes are on the release of key economic data in the form of IIP for November and CPI for December. Better-than-expected data will further improve India`s macros, keeping the rupee in a better shape against most of the rival currencies. The rupee gained 1.5% last weak against the US dollar. Upbeat data, especially CPI, will help the RBI make up its mind on cutting interest rates.
• Better liquidity condition is helping the short-term yields to continue its downward trajectory and make the yield curve to steepen further. With the rupee remaining resilient against the EM and BRICS currencies amid uncertainty about rate hikes by the Federal Reserve, FII flows will remain steady in India. That will in turn favor the 10-year yield to trade downwards in coming sessions.

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