Bond Yield Spreads

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    FIXED INCOME SECURITIES &

    FINANCIAL INNOVATIONS

    Presented By

    Jayalakshmi (10SBCM0025)

    Vittal K V (10SBCM0305)

    Daily Market Analytics of Gsec Spreads for theWeek ending 14th January 2012

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    The "yield spread of X over Y" is simply the percentage return on investment (ROI)

    from financial instrument X minus the percentage return on investment from

    financial instrument Y (per annum).

    When spreads widen between bonds with different quality ratings it implies that

    the market is factoring more risk of default on lower grade bonds.

    For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk

    bonds with the same duration are averaging 7%, the spread between Treasuries

    and junk bonds is 2%. Ifthat spread widensto 4% (increasing the junk bond yield

    to 9%), the market is forecastinga greater risk of default which implies a slowingeconomy. A narrowing of spreads(between bonds of different risk ratings) implies

    that the market is factoring in less risk (due to an expanding economy).

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    Jan 9

    Indian bond yields fell sharply to 2-month low as hopes of RBI rate

    cuts were raised after Prime Minister Manmohan Singh said theIndian economy is expected to grow by 7% this financial yeardespite the adverse impact of global economic slowdown.

    Also, government bond yields fell sharply week on week (w-o-w)

    due to expectations of rate cuts by the Reserve Bank of India(RBI).The bond market shrugged off higher supply and took downbenchmark yields by 30-35 basis points (bps). The market isfactoring in RBI absorbing most of the excess supply ofRs40,000crore through open market operations (OMOs).

    Yield on the ten-year benchmark, the 8.79% 2021 bond, fell 36 bpsw-o-w to close last week at 8.22%. Yield on the well-traded 9.15%2024 bond fell 36 bps to close the last week at 8.35%. The yields onthese two bonds have come off by 70 bps and 80 bps, respectivelyfrom highs seen in the last couple of months.

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    Jan 10

    Federal bond yields edged up on Tuesday due to mild profit taking

    after aggressive buying in recent sessions, with traders expecting abond buy back announcement from the central bank later in theday. The 10 year benchmark bond yield settled at 8.23%, up 3 basispoints from precious days close and 5 basis points above itsintraday low.

    The RBI is scheduled to auction 140 billion rupees ($2.71billion) ofbonds on Friday. The benchmark five-year swap rate was up 9 basispoints at 7.15 percent, while the one-year rate rose 6 basis pointsto 7.80 percent, tracking the move in government bonds.

    Also the betting on a buyback announcement later in the day, withborrowings by banks at the central bank's daily repo auctionstanding way above the RBI's comfort level of about 600 billionrupees. Borrowings by banks from the RBI's repo counter, throughwhich it injects cash into the banking system, rose to 1.1 trillionrupees on Monday, from 923.7 billion rupees on Friday, indicating

    the shortfall in funds.

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    Jan 11

    Within a hick up in the foreign inflows into the Indian debt

    markets, cash again tightened in the banking system.

    Inflow of $ 1.60 investment resulted in rupee appreciation from54.24 to 51.75

    Surge in equity flow made the rupee appreciate against the dollar

    Also the opinion of high differential yields between Europe andIndia in the traders leas to it

    Traders further said that leading for further tightening of cashwithout a reduction in CRR will make the yields go down

    Banks want 6% CRR to release 30,000 Cr rupees into bankingsystem

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    Jan 12 Indian federal bonds were steady on Thursday despite stronger

    than expected factory output data, as expectations of rate cutspersisted. Industrial production recovered in November raising to

    5.9% from a year earlier. RBI s announcement of debt by bank is likely to check any raise in

    needs through open market of 120billion rupees

    Raise in auto sales, infra output brought expectation s on higheryields of debt markets but all the fluctuations are in narrow band

    Reduction of lock period from 3years to 1year for investment incorporate long term infra bonds

    Investment of 1.6billion dollar in debt as compared to just 274million dollars in equity

    Raising of debt cap on FII seem to under pin debt as a preferredasset for institutional investors

    RBI deputy Governor Subeer Gokarn on Thursday said that therewas no direct link between food inflation and monetary policy,adding that it was relevant only in terms of impact of inflationaryexpectations

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    Jan 13 With an expectation that the policy makers will cut the

    borrowing costs due to the slowed down inflation to the

    least in the last 2 years, investors are adding holdings to theGovt bonds. This is backed by the factors like real interestrates and investment opportunities in other assets andcreated an affinity towards Govt bonds. One another factorthat might have influenced may be the cost to lock interest

    rates for the last year which dropped 0.03% point to 7.88%on the day of 15thjan( the next working day). Thats 62 basispoints below the Reserve Bank of Indias 8.5 percentrepurchase rate.

    Indian federal bond yields moved in a tight range on thinvolume on Friday, as most traders stayed on the sidelinesahead of a $2.7 billion bond auction and buyback, slatedlater in the day. Total volume on the RBI's electronic tradingplatform was 31.50 billion rupees ($612.8 million), lower

    than about 40 billion rupees traded on a normal day.

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    THANKYOU