The Hindu Business Line : Likely to trade in range

BONDS traded in a tight range last week. The 10-year bond closed at 5.3 per cent, same as the previous week. Going forward, bonds are likely to remain bid, but may continue to trade in a tight range.

The new RBI Governor, Dr Reddy, has stated that the Central bank would continue to adopt a soft interest rate bias. This is likely to reduce the short-term interest-rate risk in bond portfolio, and keep bonds bid.

Besides, the bond auctions is likely to be held on the first day of the coming week. The RBI proposes to sell 6.05 per cent 2019 bonds on Monday through its open market operations window. There is also an auction of 10-year bonds by three State Governments totalling Rs 995 crore.

The cut-off yield at the primary auction will no doubt set the tone for trading during the rest of the week. This notwithstanding, liquidity will still be a major driver in the market. At present, liquidity in the system is still comfortable, as suggested by the repos and excess bidding in the primary auctions. This is likely to result in continual demand for bonds.

At the auction held on September 3, the cut-off yield for 2023 bond was 6.00 per cent. The bond closed the week at 5.98 per cent, suggesting the firm undertone in the market.

That said, scope for price appreciation is limited. Bond funds that are overweight in long-term maturity sectors may see better gains than short-term bond funds.

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