Financial Daily from THE HINDU group of publications
Sunday, Aug 10, 2003
Financial Daily from THE HINDU group of publications Sunday, Aug 10, 2003 |
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Investment World
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Debt Market Bonds may see volatile trading B. Venkatesh
The yield curve shifted down marginally week-on-week, with the 10-year bond closing at 5.55 per cent. Going forward, bonds are likely to remain biddish, but may see some volatile trading. The amount accepted by RBI under repos declined to Rs 19,860 crore on Friday from Rs 25,460 crore the previous day. This suggests that liquidity in the system has fallen after the auction held for the 25-year bond on August 7. It also means that the RBI may not immediately hold OMOs to drain liquidity from the system. And that may prompt dealers to bid up prices. There is, of course, limited upside from the current level. The term structure (3 m-30 yr) collapses within 120 bps. The highly concave shape of the curve is evident from the fact that the short-term spread is just 10 bps more than the long-term spread. Further, cut-off yield on the 25-year bond was just 2 bps lower than the secondary yield in that maturity sector. Most investors may continue to concentrate on the long-ends to gain on yield pick-up. This will keep the long-ends bid, and lead to further decline in term spreads. The aggressive dealers may resort to carry trade; overnight rates provide a spread of 100 bps over the 10-year bond yields. But carry trade will expose the trading book to downside due to high yield volatility The yield volatility is driven by exogenous factors such as the forex inflows, auction calendar and statements from the RBI on interest rate outlook and money supply. The yield vols of the 10-year bond, for instance, jumped 5 percentage points to 7 per cent last week. If the market is wobbly in the coming week, funds that are overweight on long-term bonds could see some degree of volatility in their NAVs.
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