Bond yields continued to record incremental gains and moved up for the third successive week. The benchmark government security (GOI 2013, 7.27%) closed the week at 5.13 per cent, moving up by 3 basis points. But rising yields have been accompanied by falling volumes. Average daily volumes in the wholesale debt market have moved down for the third consecutive week to touch Rs 2,676 crore compared to Rs 3,260.59 crore for the week ended November 21.
When RBI specified on Thursday that banks have time till March 31 to cap investments in unlisted securities upto 10 per cent of total non-SLR investments, volumes picked up. Sentiment also improved with SEBI allowing stock exchanges to trade in unlisted bonds till March 31, 2004. Benchmark yields, which had reached 5.13 per cent by Tuesday fell to 5.11 per cent on Thursday. However, inflation spoilt the party. Wholesale price index-based inflation rose to 5.12 per cent for the week ended November 15. Falling inflation figures in the previous week thus proved short-lived. This nervousness saw yields rise to 5.13 per cent by weekend.
The yield curve has become steeper as the spread between one-year and 20-year bond yields widened to 1.61 per cent on Friday from 1.53 per cent last week.
While trading activity remained subdued, liquidity remained abundant. The daily average subscription at the RBI repo window stood at Rs 27,305 crore. Overnight call rates remained under the Repo rate of 4.5 per cent for all trading sessions.
On the forex front, the government has pre-paid $1.3 billion of external loans. A further payment of $1.5 billion is expected in December. The recent fall in the exchange rate of the rupee continued and by Tuesday it reached Rs 45.93 per dollar -- losing 9 paise over Friday's close. As dollar demand eased up with a holiday in the US, the rupee climbed a few paise in the last trading sessions to close the week virtually unchanged.
Outlook
Bond markets seem to have moved into a range-bound territory with no significant upside triggers and the downside hedged by adequate liquidity. Inflation numbers will continue to be keenly watched and could give direction. As per the RBI issuance calendar, a 20-year security is expected to be auctioned in the first week of December, which should sail through on account of comfortable liquidity.
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