Gilt prices down as BoE hikes base rate

After two days of gains, the government securities market crashed yesterday with prices of long-term paper falling by almost 50 paise.

The earlier bullish sentiment was marred by the Bank of England's decision to raise its base rate by 25 basis points (one quarter percentage point) from 3.75 per cent to 4 per cent. The Bank of New Zealand had raised its base rate last week.

The Bank of England's base rate hike has been perceived by the market as a strong signal that interest rates around the globe are firming up, and could firm up in India too.

According to Partha Mukherjee, Treasury head,UTI Bank, it would be premature to assume that there would be a complete reversal of interest rates immediately.

"However, going further, eventually we might see a possible firming up of rates," he said.

The Bank of England's action was taken seriously by market players as last week the Federal Reserve of the US had virtually signalled a gradual firming up of interest rates, said a dealer.

Bond prices fell across the board, with prices of medium term papers falling by 20-30 paise. The yield on the 10-year benchmark 7.37 per cent 2014 closed at 5.20 per cent today against 5.17 per cent on Wednesday.

The market had been seeing a rally over the last two days following the interim budget which estimated the fiscal deficit at 4.8 per cent and year-end inflation at 4-4.5 per cent.

After the news of the Bank of England rate hike, major players liquidated positions to stay in cash.

If the weekend inflation figure is positive, the market might see some buying demand. Otherwise, another round of major selling is expected, with prices falling further and the yield on 10-year paper rising to 5.22-24 per cent.