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Bond Yields Rise Yet Again

In spite of ample liquidity and lower inflation bond yields rose by six basis points over the week Concerns of a rate hike and a sell off in US treasuries kept traders on the back foot

Ample liquidity continued to govern sentiment over the entire week. The auctions by the central bank (amounting to Rs 14000 crore) failed to curtail liquidity as banks remained flushed with funds. Call rates continued to remain depressed at 0.20-0.60 per cent band for the week.

Traders continued to remain cautious, fearing another rate hike by the RBI. The yield on the 10 year benchmark 8.07 per cent GOI 2017 bond spiked to 8.14 per cent by mid week. On Thursday the market managed to recover some losses, but by Friday the sell off of US treasuries plunged the market in a bear grip. The yield on the benchmark bond finally closed at 8.14 per cent for the week ended June 8. The lower than expected inflation data for the week ended May 26, at 4.85 per cent did help boost sentiment and stem the rise in bond yields. Inflation for the preceding week stood at 5.06 per cent.

Outlook
With lower than expected inflation, fears of a rate hike will be alleviated. As far as liquidity is concerned the impending advance tax payments due on June 15 of approximately Rs 25000 crore is likely to curtail such liquidity. Therefore a backlash from the central bank is likely only after June 15. A weakening of emerging markets and possible profit booking by FII's from the stock market will also be beneficial in containing the rupee rise and this in turn will restrict the increase in liquidity. In such a scenario a rate hike could be ruled out in the near term.