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B. Venkatesh

THE yield curve shifted marginally downwards week-on-week. The 10-year bond yield closed at an all-time low of 5.67 per cent. Going forward, bonds are likely to remain bid, with those at the short-end likely to outperform the ones at the long-end.

The system is flush with liquidity. This is despite the buyback of high-cost illiquid bonds worth Rs 14,434 crore on July 19 by the Government. The total outstanding amount under repos is well over Rs 22,000 crore.

Despite this, the RBI Governor recently stated that the Central bank would not engage in OMOs to drain liquidity from the system. This was the primary reason for the bond yields testing new lows at the end of last week. The liquidity factor is likely to keep bonds bid. An interesting pattern in the last two weeks is that the long-term spreads have remained stable while the short-term spreads have increased by 4-7 bps, per week. A primary reason for this is that the market is pricing in a likely cut in repo rate.

The only factor that is likely to cap bond prices on the upside is the primary auction scheduled for the first week of August. The RBI is expected to garner Rs 9,000 crore from this auction, of which two-thirds will be from medium-term bonds. Bond dealers will be wary of aggressively bidding up prices, for that will mean tight yields at the auction.

Bond funds that are loaded on long-term bonds with the rest in medium-term sectors; those with laddered and barbell portfolio may not witness much change in the NAV. Short-term bond funds may see some upside in NAV.

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