Yields on longer papers set to ease

OUTLOOK/G-SECS

Yields on gilts, especially those with slightly long and long tenors, are expected to come off by about 10 basis points in the coming week as market players take positions in anticipation of a rally in January.

Month-end and quarter-end considerations will see mutual funds make purchases in a big way to shore up their net asset values. Banks will also build positions to increase the valuation of their portfolios.

The medium and short-tenor gilts, however, will see range bound trading. Cash flush investors are taking fresh positions in the market ahead of an anticipated rally in January when foreign banks and pension funds start adding to their bond portfolios.

Despite the inflation edging up, the gilts market will be bullish as liquidity in the banking system is abundant. The liquidity situation can be gauged by the fact that banks parked Rs 26,355 crore at the three-day repo auction held on Friday.

The wholesale price inflation rose to 5.57 percent in the week ended December 13, mainly driven up by an increase in edible oilseed prices and greater demand for manufactured products.

Inflation was up from 5.38 percent in the week ended December 6 and 3.21 percent in the year-earlier period.

The market participants take on the inflation, which has risen for five consecutive weeks, is that it has peaked and will start declining in January.

The central bank governor's comments on Wednesday that he saw no change in the inflation outlook, despite commodity prices hardening in a rebounding market, has also buoyed sentiment in the market.

Prices of the mid-long/ long-dated gilts, i.e. papers having residual maturity of 15 years and above could go up by about 50 paise.

The benchmark 10 year gilt (7.27 per cent 2013 gilt) is seen testing the 5.05 per cent yield level.

Yield on this gilt eased by about five basis points last week and finished Saturday at 5.10 per cent.