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B. Venkatesh

The yield curve remained largely unchanged week-on-week. The 10-year bond currently yields 5.76 per cent against 5.75 per cent last week. Going forward, bonds are likely to remain biddish.

In the triple auction held on July 1, 2003, the RBI received bids well in excess of the notified amounts in each of the auction. This excess liquidity in the system is likely to keep bonds bid, unless the RBI further resorts to sterilizing the excess liquidity through higher notified amounts at the primary auctions, OMOs and repos.

Then, there is the RBI Governor's statement that the Central bank continues to pursue a soft interest bias. This is likely to temper any nervousness in the market, and limit sharp price dips.

True, the yield curve still remains concave. The spread between the 30-year and the 10-year bond is just 40 bps, while that between the 10-year and the 2-year bond is 70 bps. Such tight yields give little room for bond dealers to further bid up prices.

The yield curve, however, appears to carry some value picks for the yield investors. These value picks are basically off-the-run issues that carry lower liquidity. For instance, the recently auctioned 2014 bond trades at 5.75 per cent, whereas another 2014 bond maturing a month later trades at a yield of 5.98 per cent. If the yield differential is due to liquidity risk, yield investors, who typically tend to hold bonds till maturity, may be able to pick values off each sector on the yield curve.

Finally, the RBI may increase the notified amounts in the auctions scheduled for the week July 14-21 to sterilize money supply. This factor may moderate market enthusiasm at least in the latter part of the coming week. Bonds are likely to remain biddish in the coming week.

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