It was a tricky weak for bonds and traders continued to remain cautious for the second straight week. The bond market opened on an upbeat note on Tuesday, August 21, (markets were closed on Monday) with traders expecting the US Federal Reserve to further soften interest rates in order to deal with the sub-prime crisis. Data on increasing deposit growth of banks also signaled a further SLR demand. Softer oil prices also did their bit by easing the fear of inflationary pressures. On Wednesday, August 22, the robust demand at the MSS auction further pulled down bond yields.
However, on Thursday yields rose, snapping up gains of the past two days. The trigger for this rise was the political instability at the center. Friday was no better, the rise in yields continued unabated; this time the trigger was the finance minister's comments on the need to further rein in inflation.
Inflation reported for the week ending August 11, was higher at 4.10 per cent than the week before at 4.05 per cent. Call rates remained comfortable in the 6.10-6.40 per cent range. Eventually the yield on the 10 year benchmark 7.49 per cent GOI 2017 bond fell five basis points through the week.
Outlook
In the near term, market movement will depend on two positive triggers. Firstly, until the dust on the political front settles, there will remain uncertainty in the financial markets and dealers are unlikely to take large positions until this is cleared. Furthermore, financial markets across the globe expect the Federal Reserve to cut its benchmark funds rate ahead of its next policy meeting in September.
On the flip side there is high probability of tightening liquidity over the coming week on account of the previous week's auction settlement amounting to Rs 7,000 crore, due to Monday, August 27. In addition to this outflow, RBI is likely to announce an MSS auction as well. But these liquidity issues are likely to be a temporary and positive cues will be overbearing.
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