Gilts Rally May Taper On Profit Selling

The rally witnessed in government securities in the past fortnight is expected to taper off this week on the back of profit booking. The market will continue to be liquidity driven and witness selling pressure for an every 10 paise uptick in prices.

The G-sec market, especially in the last few days, was bouyed by expectations of a repo rate cut, reiteration of a soft interest rate regime by the Reserve Bank of India (RBI) governor Bimal Jalan, and ample liquidity in the money markets.

On February 1, 2002, the benchmark 11.03 per cent 2012 paper was hovering around Rs 124.04 (working out to a yield of 7.64 per cent). Yield on this paper has dropped by 35 basis points (translating into a gain of three rupees) since then and, as on Saturday, the gilt price was hovering around Rs 127 (yield of 7.29 per cent).

"In the case of the 10 year paper, there is a yield differential of 80 basis points over the repo rate. But this could go down to 75 basis points next week at a yield of 7.25 per cent (price Rs 127.35/40), which can be taken to be the resistance level. Once this level is breached, the price of this security could test the Rs 127.80/92 levels before stabilising at Rs 127.40/50 levels," said a dealer with a public sector bank.

"Government securities having a residual maturity between 10 to 15 years will continue to attract buying interest. For an every 10 paise uptick in prices, there will be selling that will pull down prices. Players will again buy at the lower levels, only to sell once the prices look up. This sell-buy-sell cycle will continue for some time," explained the dealer.

According to a dealer with a private sector, the market is expecting a repo rate cut of about 50 basis points around the time of the budget as the yield on the 364-day treasury bill has dipped below the repo rate of 6.50 per cent.

The repo rate will bring the very-short-term rates in alignment, and the yield curve will adjust across maturities, the dealer added. He pointed out that banks have been investing heavily in G-Secs as the credit offtake has been tardy.