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Bond Street Hunts for Triggers

The sharp rises gave way to rangebound movements in the bond prices. In all, not a very active week at the bond street. With reducing spreads between various tenure securities, markets could be headed for some correction in coming weeks.

The dormant government securities gained momentum as the hopes of cut in the Employee Provident Fund rates and the repo rate bid up the prices early during the week. The 10-year benchmark 11.5 percent GOI floored near it all time low of 7.73 percent in early trades but consolidated around 7.77 percent after the Central Board of Trustees maintained the earlier level of 9.5 percent on EPF. These instruments are considered risk-free by the small savers, besides the tax rebate u/s 88 available to some. This prohibits other savings alternatives to cut rates to remain competitive against the prevalent higher interest rates on small saving schemes. Overall the market interest was once again towards the medium to long-end of the curve, as the 15 year 9.85% GOI carrying similar maturity as the EPF account, floored to its all time low of 7.95 percent during the week.

As hopes of EPF rate cut waned leading to a lackluster sentiment, the volumes at the wholesale debt segment of NSE dip sharply from Rs 5100 crore to Rs 3000 crore. Even the hopes on a repo rate cut once again did not materialise. The repo rate at 6.50 percent sets the benchmark for the overall short-term interest rates in the system. With a surfeit of liquidity, the call rates ruled steady at 6.45-6.60 percent.

At the forex front, the domestic currency slipped against the dollar due to the demand supply mismatch. The state run banks in the recent past have entered the market to suppress any steady rises in rupee, for a strong rupee renders Indian exports uncompetitive amongst the falling Asian currencies vis-a-vi US dollar.

Outlook
Bonds are expected to trade in narrow range until any trigger. With the 10-year GOI security at 7.77 percent, the spread over the overnight call rates has reduced from 200 basis points to 122 basis points. Likewise, the spread over the 2-year and 15 year GOI is just 100 basis points as against 248 basis points in October'01. As these spreads look unsustainable, the yields should be headed for correction. There may be profit booking, as market participant will prepare to actively bid in the 10-year state loan auction on January 28, 2001.