The Hindu Business Line : Higher inflation sends bond prices crashing

BOND prices crashed by up to Rs 2 across most maturities as fears of rising interest rates were compounded by the unexpectedly high inflation rate of 5.89 per cent reported on Friday.

This triggered a panic-driven sell off with most market players coming in at the same time to off-load their positions.

The yield to maturity on the 10-year benchmark 7.37 per cent 2014 ascended to its highest levels in the past one year touching 5.89 per cent before settling at 5.84 per cent.

"Strong selling pressure continues to dominate the market. A sharply high inflation prompted a major sell off in the market today. Given the recent sharp continued fall in the bond prices last week, the market lacks much appetite for fresh buying," said Mr Akshat Lakhera, interest rate trader, HDFC Bank.

Bond prices, which opened on a firm note in the morning, came down after profit taking by several institutions.

The 8.07 per cent 2017 paper opened at Rs 117.10 yield 5.15 per cent went about Rs 2 lower at Rs 115.60 but later recovered to close at Rs 116.35/50. The 7.38 per cent 2015 paper also showed a recovery when it closed at Rs 111.40 after reaching a figure of Rs 110.50/75 from the opening levels of Rs 111.85/90.

"The market is expected to be bearish, gripped with irrational fear over the next few days. But this is the time for making strategic moves and value buying of the stocks," said Mr M. Natarajan, Head, Money Markets and Investments, IndusInd Bank. Later on in the day as bond prices recovered some lost ground on the back of reassuring statements from the Chief Economic Advisor of the Finance Ministry, Mr Ashok Lahiri, that interest rates in India would not necessarily be in line with global interest rates. Although this assuaged sentiment to some extent and prompted a recovery in the market, dealers said a statement from the central bank would further allay their fears of rising interest rates.