Swings To Be Led By Cut-Off Yields

The government securities market is expected to be rangebound and will see moderate activity till the auctions of June 3 and 4 are over.

If the cut-off yield at these auctions are as per market expectations, prices of gilts will move up after consolidating at every level.

But if the cut-off is off the calculations, then activity will be subdued. In a measure to suck out the excess liquidity from the banking system, the Reserve Bank of India came out with a spate of measures including an open market operation of Rs 5,500 crore followed by two auctions of government securities.

 

The government securities to be auctioned this week will be the reissue of the 6.85 per cent 2012 and a new issue of 25-year maturity gilt for a notified amount totalling Rs 9,000 crore.

Therefore, the market, which is likely to open on a bullish note, will plateau as the auction proceeds.

Thereafter prices might move up and gilts might regain the volumes lost during the initial part of the week.

In fact, activity is expected increase as there is going to be a good amount of liquidity left in the system even after the auctions. This is because there is little credit demand in the lean season.

Investors are also flocking to the bonds market with very few avenues left to park their funds competitively.

Adding to all this is the fact that there are not very many papers available that are liquid and have good outstanding stock.

Participants feel that activity will be focussed around the 8.07 per cent 2017 and the 7.40 per cent 2012 papers.

Meantime, in a marked shift, the preference today seems to be for 9-10 year papers as against longer tenors a couple of weeks back.

This is expected to be a temporary phenomena, caused by the recent auction of the 2012 paper through OMO.

An analyst said the medium and long tenors will be back in favour soon.

Last week, the cut off announced at the OMO was higher than the expected rate of 5.85 per cent at 5.92 per cent.

Prices of gilts fell across the board following this, in an attempt to realign the yield curve.

However, after the weighted average yield of the auction, which was at a par with the market rates, was announced, things cooled off and prices of gilts rebounded.