Yield dips 16 bps; what fired up bond market?

Yield dips 16 bps; what fired up bond market? thumbnail
MUMBAI: Government bonds rallied after the Reserve Bank of India late Friday scrapped plans to sell bonds in the open market to absorb excess liquidity setting off speculation that the regulator is not keen on yields beyond 7% despite good news like a sovereign rating upgrade.

The benchmark bond yield dipped 16 basis points Monday to close at 6.89% as some speculators, and long term investors including insurers and banks bought.

“Friday’s cancellation of OMO sales have triggered a rally in gilts,” said Naveen Singh, senior vice-president at ICICI Securities Primary Dealers. “The move may have been the result of excessive volatility that day. Lowering supply will certainly assuage market and may bring back some confidence. In near term, the benchmark yield is likely to hover in range of 6.85 – 7.00%.”

The RBI cancelled a bond sale via open market operation worth Rs 10,000 crore scheduled for Thursday citing “evolving liquidity conditions”. The central bank has been regularly selling bonds in the market to ensure that its policy remains effective. It has absorbed more than Rs. 90,000 crores in excess liquidity that has kept the market rates above the policy rate of 6%.

The government bond market went through a roller-coaster session after the first sovereign upgrade by Moody’s Investors’ Service in more than a decade. The yield erased its initial gains after macro worries weighed on investors. It closed at 7.05% Friday, a tad lower than previous day.

Some traders, who short-sold the sovereign bonds rushed to cover their positions as they incurred losses.

“Further upside in GSec is unlikely in the near term, said Badrish Kulhalli, head – fixed income, at HDFC Standard Life. “Fresh buying by long term investors have taken place as they sensed an opportunity to buy bonds at attractive levels. Some traders were also seen covering their short positions, which pulled yields down further.”

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