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B. Venkatesh

YIELDS remained tight week-on-week. The 10-year yield closed at 5.30 per cent, 4 bps lower than the previous week. The intra-week volatility was, however, high due to expectation of a liquidity problem relating to RIB repayment and news about the RBI ban on Available for sale (AFS) category.

Bonds are likely to remain biddish in the coming week for the following reasons: The RBI has clarified that the liquidity in the system will not be affected due to the RIB repayments. The Central bank has also stated that it has not banned the sale of bonds in the AFS category. Both these factors remove the negative sentiment that prevailed in the bond market during the latter part of the previous week. This is likely to keep bonds bid.

Another factor is that the RBI has not scheduled any bond auctions for the coming week as well. Besides, the Central bank is also unlikely to hold OMOs because of the RIB repayments on October 1. These factors may prompt dealers to aggressively bid up prices in the coming week.

The upside from the current level, however, appears limited. The market has been unable to collapse the term structure further; the long-term spread and short-term spreads are currently 81 bps and 58 bps respectively. Of course, price inefficiencies still exist across the yield curve. The yield-investor willing to take the liquidity risk can pick some mispriced bonds off the yield curve. The 10 per cent 2014 bond, for instance, trades 43 bps higher than 5.09 per cent 2014 bond.

For the total-return investors, the yield curve has little to offer at present, what with the tight term spreads. Should the bonds become less wobbly in the coming week, aggressive traders may engage in carry trade. Funds with large exposure to long-ends may see better returns.

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