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Bond Yields Ease

Bond yields dropped 13 basis points from the previous week's close, falling below 8 per cent on the back of lower inflation as well as improvement in liquidity

Early in the week, the market found support at prevalent prices, on the back of bargain buying with the yield on the 10-year benchmark 8.07 per cent GOI 2017 bond hovering around 8.05 per cent. Sentiment turned optimistic on Tuesday on the hopes of the government presenting a lower borrowing plan during the Budget for the forthcoming fiscal year.

After the CRR hike announced on February 13, the market expected call rates to zoom to 9 per cent levels; however call rates were capped at 8.10 per cent and dropped to 6.20 - 6.40 per cent by February 23, 2007. RBI's intervention in the currency market injected liquidity in the system, alleviating fears of tightening liquidity.

However, all was not well at the bond market with bond prices taking a hit owing to a fall in US Treasury prices due to rising concerns of inflation, belying hopes of an interest rate reduction by the US Federal Reserve.

The yield on the 10 year benchmark 8.07 per cent GOI 2017 bond finally closed at 7.93 per cent for the week ending February 23, 2007 and inflation as of February 10, 2007 stood at 6.63 per cent.

Given that banks have stepped up efforts towards deposit mobilisation, there is likely to be a robust demand in the government bond market. This would be contingent on the RBI keeping the SLR constant. In spite of inflation hitting two year highs, the overall inflation for the current fiscal is still within the targeted 5-5.5 per cent.

There have been concerns of increasing oil prices in the past week. Volumes are expected to be thin over the forthcoming week with traders unlikely to take large positions owing to the budget that will be announced on February 28, 2007.