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INR Rates - INR40bn each of 5Y and 10Y Sovereign Green Bonds were issued via auction yesterday. The 5Y green bond cut-off was 7.10%, representing a yield discount of 4-6bps relative to similar-maturity conventional bonds. 10Y green bond cut-off was 7.29%, representing a yield discount of 5-6bps. Investor demand was healthy as banks can use the green bonds for SLR requirement. The next green bond auction is on 9 Feb, when another INR40bn each of 5Y and 10Y would be issued.
Banking liquidity has re-tightened in January to under INR1tn, causing O/N Mibor to rise again towards ceiling of LAF corridor. Bond-swap (GSec-OIS) spreads are certainly wide vs historical (2Y at +65bps, 5Y at +100bps), but widening trend could persist as bond yields stay supported on heavy supply outlook while OIS rates are pressured lower by increased pricing for the next RBI cut cycle.
IDR Rates - 10Y IndoGB yields (~6.65%) appear low relative to our fair range (lower bound of 6.85%), largely on lower UST yields. Compressed 10Y IndoGB-UST yield differentials likely mean that further downside in IndoGB yields will have to be driven by further declines in UST yields, rather than continued risk-on sentiments and foreign bond inflows.
Despite limited scope for price rally in 10Y IndoGB, market expectations for continued softness in the broad US Dollar are likely to support carry-seeking flows into higher-yielding EM bonds, such as IndoGBs. We think offshore-onshore IDR forward points reaching deeply negative levels are an indication of such bullishness towards broad EM.
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