Bond Yields Laddered to 8 Percent Level on Devolvement

The benchmark bond yield of 6.35% in 2020 was touched to 8.01% due to the return * in the auction of the first week

Primary distributors had to transfer Rs. 448 Cr. Of 6.35% paper 2020

Food inflation rose to 14.50% for the March 27, 2010 data, compared to 13.86% a week earlier.

The limits for the forms and the average advance (WMA) were set at Rs. 30,000 Cr. For the first half of the fiscal year and Rs. 10,000 Cr. For the second half of the fiscal year

Inflationary pressures (data will be available next Thursday) and industrial production data to influence the policy review scheduled for April 20, 2010; Inflation is likely to be in the double digits.

Market to witness an auction of Rs. 13,000 Cr. On government securities and Rs. Rs 5.8 billion of State Development Loans (SDL) this week

* Refund: it is a mechanism used by the Reserve Bank of India as part of its monetary policy to counteract volatility Advanced Payment Bond  in the price of government securities. Under this mechanism, primary distributors would have to absorb the amount subscribed, when the bid prices are unacceptable to the RBI.


Views and recommendation:


· Weekly bond issues are likely to have a greater impact on bond prices; any subsequent repayment will put pressure on the bond yields.

Liquid funds and ultra-short-term funds (formerly called ultra-short-term funds) would see their returns increase from current performance, as the shorter end of the yield curve is likely to rise in the near future once they rise policy fees.

· Investors with a longer investment horizon (more than 2 years) should wait for returns to reach 8.25-8.5 percent and can then invest in income funds.


Wide perspective:


The week started with a cooling in bond yields; The benchmark 10-year 6.35% 2020 G-Sec index slipped to 7.80% on Monday, 5 bps below its close of the last week. However, sentiments were against the market and yields rose to their three week highs ahead of the first week auction of Rs. 12 billion rupees and tightening of monetary policy to contain high inflation.


The auction results disappointed the market and the benchmark performance surpassed the 8 percent mark to close at 8.01 percent due to the return. It touched the 8.03 percent level, its highest level in over 17 months and a level that touched on March 22, 2010. The auctioned bonds got a timid response and primary traders had to return Rs. Rs 448 crore of 2020 paper at 6.35%. The RBI set the 7.9645 percent cut-off yield for the bonds at 6.35% in 2020. The other bonds were written in full amid high demand. Both received lawsuits more than twice. Due to decentralization, primary traders demanded high cutoff returns. This week, the stock choice will decide the momentum of bond yields and primary traders will demand higher underwriting fees and higher yields for fear of the return of securities. Furthermore, the 2020 bond’s dovish response at 6.35% is putting pressure on its existence as a benchmark yield and traders have been demanding a new benchmark so they can focus on the movement of interest rates rather than choosing a referral bonus.


Inflationary pressures remain intact; Food prices accelerated for the second week in a row. Inflation based on primary items rose to 14.50 percent in the week ending March 27, 2010 from 13.86 percent a week earlier. Industrial production data for February to be released on Monday and inflation data for March next Thursday are the factors that will decide the direction of the RBI’s policy review to take place on April 20, 2010.


Liquidity measured by repo / repo offers in the Liquidity Adjustment Facility auction reached an average level of Rs. 1 lakh crore against Rs. Rs 2 billion reported last week. Overnight rates also remained at the level of reverse repurchase rates due to the high liquidity of the system. However, corporate bond yields saw more activity in trading circles. Its spread over its G-Sec counterpart slipped across all categories. The spread of 5 and 10-year corporate bonds over their counterpart G-Sec fell to 76 bp and 63 bp from 81 bp and 82 bp,