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The benchmark government securities yield fell 10 basis points last week to close at 6.155 per cent on Friday and the momentum is expected to continue this week, according to bond traders who are waiting keenly for the consumer price index (CPI) inflation to be released mid-September.
The rally in the G-Secs market came on the back of a combination of factors like the US Fed Chair Jerome Powell’s dovish stance at the Jackson Hole Summit, high domestic liquidity and absence of key triggers in the market.
Period of apprehension
Bond traders, however, had a period of apprehension post the monetary policy announcement earlier this month.
Indications from the RBI that it is beginning to normalise its monetary policy by balancing liquidity at the shorter end through VRRR, along with one of the MPC members expressing reservation about the accomodative stance, made the market nervous. A primary dealer said there were concerns that more members would convert to hawks.
Fed stance soothes nerves
Bond yields continued to rise gradually and reached a peak of 6.255 per cent ahead of the Jackson Hole summit. However, Powell’s dovish stance calmed the nerves with the benchmark yield moving 10 basis points lower last week to close at 6.155 per cent.
Moreover, traders indicate that there was significant foreign portfolio investors’ (FPI) participation in the G-Secs market last week, especially in long tenor papers.
Vijay Sharma, Senior Executive Vice-President, PNB Gilts said the worst of the inflation seems to be over.
“The situation on the fiscal side is also not bad. It looks like the GST collections are also doing really well. These factors should augur well for bonds in the coming times unless we encounter some unexpected events. We can say that the level of 6.25 is now well protected. The momentum being very strong, the market can rally up to 6.1-6.12 per cent also unless some event pierces the rally,” Sharma said.
Siddharth Shah, head of treasury at STCI Primary Dealer said, at 6.25 per cent levels, the market found comfort in going long.
“Furthermore, the Fed Chair’s speech gave some amount of comfort. With the SDL supply seeing reduction, expectations of additional borrowing diminishing on account of upbeat GST collections, replacement demand for bonds on account of G-SAP amidst high market liquidity, conditions became ripe for a rally in bond yields. The benchmark yield is now close to 6.15 per cent and has the potential to go further down to 6.10-6.12 per cent,” Shah said.
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