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Gilts Had The Edge

Government securities were in the grip of a bull frenzy for the fourth consecutive week. And the coming weeks could witness more feverish action in bonds - this time in corporate paper.

There was a strong buying interest in the bond market for the fourth consecutive week as the ample liquidity drove up prices. The apex bank set a higher cut-off price for the 364-day treasury bill and the move was taken as a sign of its intention to realign the short-term interest rates. This perked up buying interest. Result: the benchmark 10-year, 11.05% GOI sank to a historic low of 7.41 percent and is already down 48-basis points in the current calendar.

At the same time, bank purchases on behalf of RBI, coupled with strong corporate demand for greenbacks put pressure on the rupee, which shed 9 paisa during the week. Profit booking by the banks did help the rupee close higher than its intra-week low of Rs 48.76. However, even the apex bank's statement that it was not in favour of a weak rupee, but was aggressively buying dollars to boost forex reserves, failed to really strengthen the rupee and it closed at Rs 47.70.

Though this was part of the reporting fortnight for banks, the inflows on account of coupon payments kept the call rates soft throughout the week. Call rates managed to close at the month's high of 7.50-8 percent only on the back of scanty supplies towards the end. Players resorted to RBI's reverse repo route after a month and parked Rs 30,980 crore at a repo rate of 6.50 percent during the week. With the spreads narrowing 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 has fallen to 6.49 percent -- is close to the interest earned on lending to RBI in one-day repo auctions. Looking at the unsustainability of the spreads, markets seem to have fully factored in the repo rate cut.

Privatization Gets A Leg-up
After a long wait, the government finally managed to sell its stake in VSNL and IBP to the Tatas and IOC respectively. The two deals, which added Rs 2,592 crore to the government's disinvestment kitty, were closed at a higher amount than the reserve price set by the disinvestment ministry. While the total collections so far are still way below the targeted amount of Rs 12,000 crore from 13 PSUs for the current fiscal, the sell-offs augur well for the bond market as they are likely to reduce the government's appetite for market borrowings. As a part of its pre-election and pre-budget propaganda, the government has also committed itself to speedier reforms in the energy and pharmaceutical sectors. The moves have already boosted the Sensex to its eight-month high. Can the government actually do it? Let's see.
Outlook
With the sovereign yield curve heading southwards across maturities, the spread between a gilt and a corporate bond with the same tenure has nudged up from 150 basis points in mid-January to a very attractive 200 basis points. Next week could see more excitement in bonds with the budget around the corner. But the RBI can always spoil the party by deviating from its softer-interest rate bias.