Gilts to stay ranged

OUTLOOK

Government securities are also expected to stay ranged, notwithstanding the fact that the system is flush with liquidity. The market expects the interest rates to be netural for some time.

Yield on the benchmark 10-year gilt, which closed last week at 5.19 per cent, is seen hovering in the 5.14-5.20 per cent range in the coming week.

Inflation and interest rate concerns will see banks realigning (churning) their portfolio. They will hold more of treasury bills, short and medium tenor gilts compared to long-dated gilts. As yields increase, banks will also try to bring down their average holding cost of their portfolio.

While foreign institutional investors are unlikely to take fresh exposures on account of year-end considerations, mutual funds will be actively buying and selling. Daily average volumes in the gilts market are seen hovering in the Rs 3,000-4,000 crore in the coming week.

The yield curve, which has been flat for the last few months, has got realigned a tad last week after the auction of the 6.01 per cent 2028 gilt.

The RBI announced a higher cut-off yield of 6.25 per cent for this gilt. The yield differential between the benchmark 10-year gilt and the one-year residual maturity gilt is still very low at around 90 basis points. In the US, the yield differential is almost 200 basis points.