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B. Venkatesh

THE bond curve shifted down marginally week-on-week. The 10-year bond currently trades at 5.25 per cent, down 30 bps over the previous week. Going forward, bonds are likely to trade in a range, with a somewhat downside bias.

The bond market appears to have reacted sharply to the 50 bps repo rate cut last week, and may well seek higher levels in the coming week. This already has happened at the short-end of the yield curve. In the 91-day T-bill auction held on August 27, the cut-off yield of 4.74 per cent was higher than the secondary yield by 14 bps.

Another reason is that the RBI is scheduled to hold primary auctions of long-term bonds totalling Rs 9,000 crore during September 1 to 7. This could prevent dealers from keeping bonds biddish; otherwise, the cut-off yields may be tight.

Then, the term structure of interest rate (one to 30 years) spans just 140 bps. True, the term structure has widened compared with the previous week due to the sharp decline in short-term yields since the repo rate. Despite that, bond dealers do not have much scope to bid up prices, lest the RBI engages in OMOs. In the past, the Central bank has conducted OMOs or increased the notified amount at the primary auction to drain excess liquidity from the system.

That said, lending support to bond prices at the current levels are two factors- liquidity and low inflation. Liquidity in the system is still comfortable, the OMOs notwithstanding; the money outstanding under repos is Rs 25,000 crore.

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