Undercurrent Of Nervousness

Trading sentiment in the government securities market will be distinctly nervous this week. Good liquidity notwithstanding, higher inflation rate coupled with the perception that interest rates have bottomed out will take a toll on the market.

Further the market will be edgy as no end to the US-Iraq standoff appears in sight. Yield on the benchmark 9.81 per cent 2013 gilt, which finished Saturday at 6.56 per cent (price: Rs 124), could rise by 20 basis points.

In price terms, this gilt, which on Saturday touched an intra-day peak yield of 6.63 per cent, can fall by around Rs 1.50. Yield on the 10-year gilt has gone up by around 73 basis points from the mid-January trough of 5.8250 per cent. With participants exiting long-tenor gilts due to inherent volatility that this segment is subject to, trading interest should continue to be in the medium-tenor gilts.

The yield curve has risen in the past fortnight as investors factored in risks of a war and waning hopes of a repo rate cut. A steeper curve usually means the market is not expecting a rate cut. A yield curve maps the returns across various maturities.

Rate cut hopes and flush liquidity, boosted by the central bank