The Hindu Business Line : Bonds end unchanged as market factors in rate hike

Although prices fell by around 25 paise during the day, they were almost unchanged at the end of the day from Monday's closing prices. The total traded volume on the order-matching system at Rs 2,180 was relatively high compared to the last few weeks.

While there were rumours that the central bank had intervened by buying in the secondary market, dealers also said that the market had more or less factored in an interest rate hike.

Mr Romesh Sobti, Executive Vice-President and Country Representative - India, ABN Amro Bank, said, "Given the fact that a large section of the market expected this hike, yields should not react sharply. While short-term yields are likely to rise moderately in line with the reverse-repo rate, a decisive gesture like this removes a lot of the uncertainty and should bring some stability to the bond markets."

While bond prices are expected to remain stable in the next few days, dealers said that yields could harden again with the scheduled Rs 9,000-crore government securities auction in the first week of August. "The yields will rise marginally with every G-sec auction. The 10-year yields are likely to go up by 15-20 basis points in the next two months and could touch 8.50-8.60 per cent by the next review of the Credit Policy in October," said Mr Nitin Jain, Head-Fixed Income, ICICI Securities.

Some dealers also said there could be some tightening in liquidity conditions in the next few months with credit growth continuing at a high pace.

However, others said that ample liquidity and a pre-emptive rate hike could keep interest rates range-bound, with a downward bias. "At the longer end of the yield curve, supply in the form of primary Government security auctions will prevent yields from falling beyond a point. Bonds are likely to trade in a range with a positive bias for some time," said Mr Sandeep Bagla, Head - Fixed Income, Principal PNB AMC.

The 7.59 per cent-10 year-2016 paper opened at Rs 95.85 (8.21 per cent YTM) and closed at Rs 95.82 (8.22 per cent YTM), unchanged from Monday's Rs 95.82 (8.22 per cent YTM). The 7.37 per cent-8 year-2014 paper opened at Rs 95.82 (8.10 per cent YTM) and ended at Rs 95.74 (8.12 per cent YTM), slightly lower than Monday's close at Rs 95.80 (8.11 per cent YTM).

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