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Caution in Bonds

The US sub-prime crisis ruffled a few feathers in the bond market as well with fear of an impending liquidity crunch, but lower inflation saved the day for bonds

Trading in the market was cautious owing to the Rs 8000 crore worth of bond auctions this week in addition to the sale of Rs 3334 crore, 10-year loans by state governments. After last week's large correction, the market continued to remain more or less stable. Losses were also stemmed by the support from banks as many of them were nearing their SLR limits.

The US sub-prime crisis also caused flutters in the bond market, leading to fears of FII's pulling out of emerging markets and consequently causing the Rupee to weaken. The past week also saw a trailer of such a possibility with the Rupee sliding by about 1.5 per cent. Therefore the possibility of a liquidity crunch cannot be completely ruled out just yet. The yield on the 10 year benchmark 7.49 per cent GOI 2017 bond spiked to close at 8.04 per cent on Thursday, August 16. But by Friday, August 17, much lower than expected inflation at 4.05 per cent for the week ending August 4, brought cheer to the market. Corresponding inflation for the week ending July 28 stood at 4.45 per cent. As a result yield on the benchmark finally closed at 7.99 per cent.

The bond market will look at the U.S treasuries for cues on interest rate movements. The Rupee movement will also give traders fresh cues on the near term liquidity situation. Especially since, the buoyancy in liquidity over the past couple of months has been attributed to the strengthening Rupee. So far the reaction of the US Federal reserve in dealing with the potential sub-prime threat has been encouraging and the Rupee is likely to strengthen in line with this.