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Bonds Survive Attacks

The sentiment for the bond market remains positive. The recovery in the bond market from its bottom level has been sharp despite uncertainty. Bond prices should attain stability and even gain marginally from these levels now, notwithstanding an event risk

The bond market showed cautiousness replacing exuberance over the fed rate cut and the assurance of a no retaliatory move after Thursday's attacks. The previous week's government auction and open market operation squeezed liquidity during the early week as sovereign bonds shed Rs 1-1.50, fearing another RBI sell-off. The strained liquidity was reflected in the lackluster response to the only repo-auction and the call rates at a high of 8.25 percent.

Later the bond prices started moving up again after five-day consecutive fall with the cut in overnight fed rates. This also spiked the long awaited repo rate cut. The attack on parliament did spoil the party for some time, but the eased out liquidity through reverse repo inflows of Rs 4400 crore and finance minister's reassurance stemmed further fall. The 10-year benchmark sovereign bond (2011, 11.50%) closed the week at 7.87 percent, off from week's high of 8.16 percent. Taking advantage of the low yields, government mopped-up Rs 123 crore through 3 state government instruments.

The call rates also settled down in the 6.25-6.50 range. The firm rupee against the dollar, bowed down the parliamentary attacks, but was supported by export remittances and offloading by banks.

The Reducing Spreads…….
Nearly eighth weeks since the bank rate cut, gilt yields at the long-end dipped by over 100 basis points. This has lowered the spread for banks and FI's, forcing them lower their deposit rates. Banks have not reduced the lending rates despite the dull credit off-take and SBI and PNB reduced the deposit rates by almost 50 basis points across maturity. Life Insurance Corporation, which deploys over 40 percent of its mobilization in gilts, discontinued its few schemes in their present form. The only high-return popular fixed income option left is the small savings scheme of National Savings Organization. And this too will undergo a change as the finance ministry goes ahead with Y. V Reddy recommendations of realigning the administered saving scheme returns in line with the market returns. Another development was RBI reserving 5 percent of government bond auctions for retail investor.

Outlook
The sentiment for the bond market remains positive. The recovery in the bond market from its bottom level has been sharp despite uncertainty. The advance tax outflow of Rs 8000 crore could have a bearing in short-term. Bond prices are likely to attain stability or gain marginally from their level now, notwithstanding an event risk.