The Hindu Business Line : Bonds likely to remain bid

BONDS traded in a tight range week-on-week. The 10-year bond currently trades 5.72 per cent, the same level as the previous week. Going forward, bonds are likely to remain bid, but may continue to trade in range.

Consider the factors. Liquidity in the system is comfortable, the RBI's sterilisation measure notwithstanding. In recent times, the RBI has resorted to increasing the notified amount at the auctions to drain excess liquidity from the system.

In the auction held on July 15, the RBI sold 2020 and 2032 bonds totalling Rs 9,000 crore against an initial notified amount of Rs 5,000 crore. Despite this, total amount outstanding in one-day repos is over Rs 25,000 crore.

The next bond auction is scheduled only in the first week of August according to the RBI auction calendar. The system is likely to be flush with liquidity till such time, unless the RBI resorts to OMOs. Higher liquidity is likely to keep bonds bid.

Then, term spreads still remain tight. The long-term spread is currently 74 bps while the short-term spread is 35 bps. This provides limited scope for dealers to bid up prices. Besides, yield volumes have declined during the previous week. If this is any indication, bonds may trade in a tight range in the coming week.

Despite the concave-shaped yield curve, several maturity sectors present marginally under-valued securities. The 11.57 per cent 2004 bond, for instance, trades 6 bps lower than the 12.5 per cent 2004 bond on a YTM basis. Yield investors may find this marginal price differential worthwhile.

The government completed its long-scheduled buyback program on July 19. The minimum discount rate to the market price was fixed at 7.5 per cent. Though all the bonds were off-the-run issues, the yields at the auction may set the trading range for the coming week.

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