The Hindu Business Line : Pre-Budget sentiment bullish on bonds

Traders said that the positive outlook for inflation and the absence of Government borrowings for the remaining part of this fiscal ensured bonds remained stable.

Besides, the Economic Survey had also helped create a positive sentiment on the prospects for the economy, implying that revenue expansion and fiscal controls would be sustained.

Reforms: The Prime Minister, Dr Manmohan Singh, and Finance Minister, P. Chidambaram, on many occasions in public forums or in private gatherings, had emphasised that the overall thrust of economic reforms would continue. Most markets have interpreted this as a positive outlook for interest rates. This is because if fiscal controls were in place the pressure on interest rates would be less since the Government is the largest borrower.

Low sovereign borrowing implied that interest rates would also be stable.

Positive outlook: The positive outlook on the economy reflected in the 91-day Treasury bill auctions last week.

The cut-off yields were 5.24 per cent, around four points lower than the previous week. Besides, weighted average yields were also lower than the cut-off yields.

The weighted average yield at the auction was 5.20 per cent. Traders said that the lower weighted average yield was partly because some of the competitive bids received for the notified amount of Rs 2,000 crore were actually lower than the cut-off yield, implying a surfeit of liquidity.

Surplus liquidity was reflected in the three-day reverse repo auctions. The mop-up was close to Rs 27,000 crore.

This trend also resulted in pushing down the 10-year yield to maturity (YTM) to 6.59 per cent last week on a weighted average basis, from the previous week's 6.63 per cent.

There were drop in trading volumes, with the average daily trade at around Rs 3,000 crore.

Few sellers: Very few were prepared to sell ahead of the Budget though there were several institutional buyers, including life insurance companies.

Life insurers were focussed on purchase of high-coupon securities; the favoured papers being the 9.85 per cent 2015 and the 10.79 per cent 2015. But, only small lots were sold by some banks at YTMs of 6.71 per cent and 6.88 per cent respectively.

That there were a large number of buyers of securities was evident from the low spreads, between one year and 23 years.

Inflation: What also propelled yields was the positive inflation outlook. Inflation as measured by the wholesale price index remained at 5.01 per cent.

Real yields widened to 74 basis points up to one year. Despite this slight widening, real yields were still below global levels of 1.5-2 per cent. As a result, most traders expect yields to remain steady at current levels up to the end of this fiscal.

Besides, rising credit offtake was also expected to hold yields at current levels. Already, the high credit offtake has triggered ICICI Bank to hike its benchmark prime-lending rate to 11 per cent.

Yields seen steady: Despite high credit growth, most bankers expect yields to remain steady. This was partly on account of the uptick in foreign exchange inflows.

The inflows were adding liquidity to the banking system. This was evident from the $2.979 billion inflows to the foreign exchange reserves, pushing up reserves to a record $132.959 billion. Bankers anticipate the return of negative forward premia in view of the high inflows. Forward premia for six months up to 12 months was below two per cent.

Prepayments: The rising inflows also triggered speculation among bankers that the Government may opt for making one more round of prepayments of foreign debt.

Bankers expect this to be announced in the Budget.

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