Bond yields likely to rise on Dubai, dollar concerns

The yield on government bonds may move up on Monday as a fall-out of the upheaval in the market due to the plea by Dubai World, a Government of Dubai-owned company, for a six-month pause in repaying debt.

Dealers said the prices are likely to open steady, with a downward bias on concerns over the repercussion of the DW default. The bond yield on 10-year benchmark paper may rise to 7.25 per cent in the near term.

On Friday, the government bond market ended lower, tracking profit booking by market participants. The benchmark 6.9 per cent 2019 paper closed at Rs 97.99, implying a yield of 7.19 per cent.

The turnover on the Negotiated Dealing Platform was Rs 12,625 crore. The top-traded securities were 6.35 per cent 2020 paper and 6.90 per cent 2019 paper, with turnover of Rs 5,520 crore and Rs 3,190 crore, respectively.

Another aspect which could influence bond yields is overnight movement in US treasury notes. In addition, next week, there are plans to raise Rs 10,000 crore by auctioning through bond offerings (three gilts) that could lend downward pressure on prices.

Call rates to stay soft
The interest rates in the inter-bank overnight market are expected to remain soft on abundant liquidity in the system. Banks are already maintaining more reserves than the mandatory level. This could see some dip in demand for funds next week, said the treasury head of a public sector bank.

The systemic liquidity remained ample and the money market rates were soft. The overnight call rate moved in the range of 3-3.30 per cent. On Friday, the Reserve Bank of India absorbed Rs 94,070 crore under the Reverse Repo window. RBI did not infuse any amount under Repo operation.

Rupee may appreciate
Tracking the value of the dollar and risk appetite in the international market, the rupee may appreciate next week. Last week, markets world over saw a rise in volatility due to fear of another bout of financial crisis, when Dubai World sought a six-month pause in repaying debt.

On Friday, the rupee closed at 46.64 against the dollar. The forward premium eased sharply across all tenors. The six-month forward premium was 2.38 per cent. In the currency futures market, a total of 22,60,014 contracts were traded on the National Stock Exchange, with a volume of Rs 10,599.44 crore. The most actively traded contract was dollar-rupee December 29, 2009. The last traded price for this contract was Rs 46.74.

The one-month rupee contract in the non-deliverable forward market is currently being traded at Rs 46.80/46.90.