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Bond Street on Fire

Government securities were gripped in bull frenzy for the fourth consecutive week. With all eyes on the forthcoming budget now, coming weeks could witness a more heated up sentiment.

Bull frenzy gripped the bond market for a fourth consecutive week as the ample liquidity drove up the bond prices to new heights. The apex bank setting a higher cut-off price for the 364-day Treasury bill was taken by the market as its intention towards realigning the short-term interest rates, which induced fresh buying interest. The benchmark 10-year, 11.05% GOI sank to historic low of 7.41 percent and is down 48 basis points in the current calendar. On the other hand, apart from the corporate demand for greenback, the bank purchases on behalf of RBI, triggered weakness in the domestic currency, which shed 9 paisa during the week. At the same time, profit booking by latter led the recovery from its intra high of Rs 48.76 on some occasions. However towards the end, the apex bank stated that its not in favor of weak rupee but is aggressively buying dollars to boost forex reserves failed to have an impact as rupee shed 2 paisa to close at Rs 47.70 per US dollar.

Despite it being the reporting fortnight for banks, the inflows on account of coupon payments kept the call rates soft throughout but folded up at its month's high of 7.50-8 percent on the back of scanty supplies towards end. Even the players resorted to RBI's reverse repo route after a month, after parking in Rs 30980 crore with RBI repo at 6.50 percent during the week. With the narrowing spreads between the short and long duration bonds, the players have been clamoring for a repo rate cut for quite some time now. For instance the yield on a 364-day Treasury bill which fell to 6.49 percent is almost similar to interest earned on lending to RBI in one-day repo auctions. Looking at the unsustainability of the spreads, markets have fully factored in the repo rate cut.

Privatization Gets a Kicker
After a long wait, government finally managed to sell its stake in key PSUs- VSNL and IBP to Tatas and IOC respectively. The deal which fetched an aggregate Rs 2592 crore to the government's disinvestment kitty, was higher than reserve price set by the disinvestment ministry. While the collections are still far below the targeted amount of Rs 12000 crore from 13 PSUs for the current fiscal, it augurs well for the bond market as its likely to reduce the government's appetite for market borrowings. Besides, as a part of its pre-election and pre-budget propaganda, government committed itself to speed up reforms in the energy, pharmaceutical sector also. While the same lifted up the Indian stocks at there eight-month's high, going forward, government is likely to be looked upon seriously by its critics.

Outlook
While the sovereign yield curve nudged down across the maturity, the spread between a similar tenure corporate bond, i.e, from 150 basis points in mid- January has risen to a sharp 200 basis points, thus rendering corporate bonds as an attractive buy. At the bond street, it could be another heated week with all hopes pinned on the budget to be tabled three weeks from now, notwithstanding the apex bank's deviation from its softer interest rate bias.