Financial Daily from THE HINDU group of publications
Sunday, Oct 12, 2003
Financial Daily from THE HINDU group of publications Sunday, Oct 12, 2003 |
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Investment World
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Debt Market Remains tight B. Venkatesh
BOND yields remained tight week-on-week, though the market did witness high intra-week volatility. The 10-year yield, after marching towards 5 per cent during the week, closed at 5.11 per cent. Going forward, bonds are likely to remain biddish. The primary factor that is likely to drive bond yields lower is the expectation of a 25-50 bps rate cut by RBI. The immediate target for the 10-year yield appears to be 5 per cent. Supporting this expectation is the ample liquidity in the system. In the recent OMO sale, the RBI received bids totalling nearly Rs 10,000 crore against a notified amount for Rs 5,000 crore for the 5.45 per cent 2009 bond; bids for the 2023 bond were also overwhelming. And this when the OMO was announced just one day before the auction date. Then, the amount outstanding under the 3-day repo is currently Rs 17,805 crore. Add to that the coupon inflows and redemptions totalling Rs 23,000 crore. Banks are likely to use this liquidity in increasing the size of their trading book. The demand is likely to be concentrated at the long-end. The reason is not far to seek. Should the RBI cut bank and repo rates, the long-ends are likely to appreciate more than the short and medium-term sectors. Moreover, the current term structure provides more scope for bidding long-term bonds. That the 5.69 per cent 2023 bond sold by RBI through its OMO window closed 5 bps lower than the cut-off yield in secondary trades is indicative of the demand for long-ends. The only factor that is likely to keep bond dealers wary is the rising inflation, which currently stands at 5.03 per cent for the week ended September 27. Bond funds that are overweight on long-term sectors are likely to see better returns in the coming week.
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