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Bond prices rally; yields likely to further soften

Our Bureau

Mumbai , Jan. 4

AT long last, bankers and debt market dealers have reason to smile. For them, the new year has kicked off on a positive note, with bond prices rallying by over one and a half rupees across maturities in the first four days alone.

The 10-year benchmark paper, the 7.38 per cent 2015, soared to Rs 106.90 on Tuesday, at a yield to maturity (YTM) of 6.47 per cent, as against a price of Rs 105.45 in the beginning of the year, at a YTM of 6.55 per cent.

The prices are being buoyed by the surplus rupee liquidity in the system, on account of a variety of factors including a surge in bank deposits and a reversal of advance tax outflows back into the market, according to analysts.

"Most traders and investors who had so far been sitting on thin positions have re-entered the market, so there is a lot of buying interest. The market is gushing with liquidity due to a lot of flows coming into the equity markets and an increase in government spending. So gradually the money has started coming back into the system," said Mr Vivek Ahuja, Head-Fixed Income Research, Tower Capital Securities.

"There is also a certain cautious optimism on the inflation front. The month of January may give traders an opportunity to make some gains, but one has to watch if the central bank may come out with some measures to sterilise the liquidity," he added.

Before the advance tax outflows, the amount placed in the reverse repo was to the tune of Rs 20,720 crore, as on December 9, 2004. After the outflows, the amounts placed in the reverse repo dwindled to Rs 365 crore, as on December 22, 2004.

On Tuesday, the central bank sucked out around Rs 40,000 crore worth of funds from the system, which in itself is indicative of the extent to which the market is currently liquid.

"There are real reasons for bond yields to soften further. Not only has there been an easing in inflation and global oil prices but the government borrowings have not been very high and spending is on the rise. All put together these are strong reasons for yields to stay low," according to Mr R.V.S. Sridhar, Vice-President (Treasury), UTI Bank. However, whether this trend will be sustained on a long-term basis remains to be seen. Global crude prices are not expected to drop substantially from these levels and domestic metal and cement prices are going up. So domestic inflation might eventually come under pressure, he said.

Bankers and debt market participants are concerned that the central bank may come out with some measures to sterilise the liquidity in the system. The RBI had hiked the cash reserve ratio and the repo rate last year in order to curtail inflation spurred by liquidity pressures.

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