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Bond Market Bullish

Bond Yields eased significantly offering a respite after 14 trading sessions. There was renewed optimism in the market owing to softening of oil prices and a cut in the auction size of bonds

The saving grace for the bond market came early in the week with an easing of call rates which had hit a high of 18.5-19.5 per cent per cent on December 29. Call rates on Tuesday, January 2, were significantly lower at 8.50- 9.50 per cent. Consequently, the yield on the benchmark 7.59 per cent GOI 2016 bond ended at 7.54 per cent on January 2, down 8 basis points from the close on December 29.

There was further improvement during the week, and the rates ended on a strong note of 6.50-7 per cent, closer to the levels before the CRR hike was announced. Concerns of tightening liquidity were further eliminated with increased government spending and interest payments to provident funds towards its borrowing have boosted fund inflows, and in turn supported bonds.

Through the week traders were cautious owing to the implementation of the second phase of the CRR hike on January 6 coupled with the expected auction by the RBI which would have further tightened liquidity. As a result, the yield on the benchmark 7.59 per cent GOI 2016 bond rose to 7.58 per cent on January 4.

However, by the end of the week, lower oil prices eased worries of higher inflation with crude trading below $55 a barrel. Sentiments turned bullish with the RBI announcing a revision in the auction size from Rs 9,000 crore to a lower Rs 4,000 crore by canceling the sale of the 10-14 year bond. The recovery on Friday saw the yield on the benchmark 7.59 per cent GOI 2016 bond finally end on a strong note of 7.55 per cent.

Inflation was 5.48 per cent for the 12 months to December 23, 2006. It continues to remain close to the upper band of the targeted 5-5.5 per cent for the fiscal ending March 2007.

Outlook Caution is likely to prevail in the week ahead. Traders will gauge the liquidity conditions which might get strained as the second stage of the CRR hike comes into effect. But with the central bank flush with funds and willing to pump in money, call rates are likely to remain range bound.

Uncertainty about the outcome of the policy review scheduled towards the end of January is likely to weigh on sentiments. Traders are unlikely to take large positions until this ambiguity is out of the way. Any further negative developments on the inflation front will dampen sentiments.