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Dry Week for Bond Markets

The week ended November 30 continued to lack lustre in the government bond market inspite of easing oil prices as liquidity woes ruled sentiment

The week continued to lack lustre in the government bond market, with liquidity woes taking over sentiment.

On Monday following outflows on account of auctions held the previous week, the bond market was steady. Wednesday was more jittery than the previous trading sessions. As expected by many, the central bank accepted bids worth only Rs 1,000 crore as against the Treasury bill auction size of Rs 3,500 crore. While this did help retain money in the system, the call rate continued to trade above the repo rate, i.e. higher than 7.75 per cent.

Further growth in money supply was way above the central bank's comfort zone and this put traders on the back foot, as they feared a backlash from the central bank. While on Wednesday, a comment by a government official hinted that auctions under the market stabilisation scheme (MSS) were unlikely till end December; tight liquidity conditions hindered a rally. The auction under MSS is conducted to sterilize the liquidity implications of the central bank's intervention in the currency market.

There was relief on Friday, as bond yields recovered some losses. After touching a high of 7.92 per cent on Thursday, the yield on the 10 year benchmark 7.99 per cent GOI 2017 bond corrected to 7.90 per cent on Friday. The push came from the finance minister's comments that economic growth had moderated. This in turn fuelled speculation that the central bank will keep rates unchanged for the rest of the current fiscal. Further, there was some easing of oil prices as well as a rally in US treasuries. Inflation was higher at 3.21 per cent for the year ending November 17, compared to 3.01 per cent for the previous week. The market however, did not react to this increase. The yield on the benchmark bond finally closed two basis points higher than its previous week's close.

Top Gainers
Scheme Name   1 Week Return (%)
Gilt: Medium & Long-term  
JM G-Sec PF Plan  0.31
ICICI Prudential Gilt Investment  0.2
ICICI Prudential Gilt Investment PF  0.18
Magnum Gilt Long-term PF  0.16
Magnum Gilt Long-term  0.16
Category Average  0.1
Gilt: Short-term  
ICICI Prudential Gilt Treasury PF  0.19
Birla Gilt Plus Liquid  0.12
Reliance Gilt Short-term  0.12
Birla Sun Life GSF Short-term  0.11
Principal GSF Saving  0.11
Category Average  0.09
As on November 30

The government is scheduled to auction Rs 7000 crore worth of bonds between December 7 - 14. This coupled with advance tax payments will again put a pressure on liquidity over the forthcoming week. Yet, possibility of a rally cannot be ruled out as speculation of a rate cut by the U.S Federal Reserve in mid December is beginning to gain momentum. However, tight liquidity could frustrate such a rally.