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Gains Washed Away

The week was not positive for the bond market. The 10-year benchmark 7.99 per cent GOI 2017 bond conceded its recent gains as the traders feared an increase in CRR

The week was not positive for the bond market. The optimism that the US fed rate brought was soon washed away, as the 10-year benchmark 7.99 per cent GOI 2017 bond conceded its recent gains with the yield rising by as much as seven basis points from its previous close.

While the rest of the country was debating about a downward revision in key lending rates, bond market traders feared an increase in the CRR. This is how it panned out:

On Monday, September 24, the bond market reacted severely to the Rs 16,500 crore bond auction announced by the central bank on the previous Friday. Fearing tightening cash supplies as well as the fact that most banks would refrain from taking fresh positions owing to the half yearly closing of their accounts, the yield on the 10-year benchmark 7.99 per cent GOI 2017 bond rose by four basis points. Tuesday was no better. The borrowing calendar issued by the central bank for the second half of the financial year 2007-08 indicated a plan to absorb Rs 33,000 crore in October and November, which again pulled down sentiment. On Wednesday the scheduled bond auction received a positive response. But on Thursday fears of a large MSS auction next week made the market weak. Matters were not helped by a jittery call market.

By Friday the call market had cooled off. Inflation for the week ended September 15 stood at 3.23 per cent down from the previous week's 3.32 per cent. But in spite of these positives there was little cheer in the bond market. The yield on the 10 year benchmark 7.99 per cent GOI 2017 bond finally closed at 7.90 per cent. After market hours the central bank announced a special Rs 7,000 crore auction for next week to drain out excess liquidity generated by its intervention in the currency market.

Outlook
Inspite of rumours of a possible upward revision in interest rates, bond yields will recover from the slump over the last week. For one thing the current levels will unleash bargain buying. Further crude prices have also marginally eased. In the absence of any positive cues the bond market is likely to trade within a range.