The bond market perked up on Monday, after the central bank decided to abstain from issuing any fresh securities under the market stabilization scheme for the entire week. Traders expected a liquidity crunch owing to the previous week's (August 20-24) Rs 7,000 crore auction settlement. On this good note, the yield on the 10 year benchmark 7.49% GOI 2017 bond fell two basis points to close at 7.92%.
However, by Tuesday these minor gains were wiped out as traders sold bonds in preparation for Wednesday's treasury bill auction amounting to Rs 5,500 crore. Wednesday was marked by another tense trading session, with fears of growing risk aversion of emerging markets gripping investors and fueling liquidity concerns. Consequently the yield on the 10 year benchmark bond rose another three basis points to close at 7.95%. Thursday was no better, and this time the trigger came from the central bank's quarterly report which expressed fears on inflation.
On Friday, reported inflation at 3.94% for week ending August 18, broke the 4% barrier and considerably lifted sentiment. The yield on the benchmark bond fell to 7.93%. After market hours the central bank announced an auction of Rs 7,000 crore on September 7.
Outlook
Market sentiment seems contradictory to key indicators. With inflation under control and a broad consensus that the next quarter will see a slow down in GDP growth, markets continue to remain jittery. The main culprit is the uncertainty of the sub-prime crisis. If there is any sign of lowering investor confidence in emerging markets, bond market participants will come under increasing pressure to liquidate their holdings.
Over the near term liquidity will be constrained with an outflow of approximately Rs 35,00 crore in mid-September on account of corporate advance tax payments.
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