Bull run ahead

OUTLOOK/ Government securities

The government securities market is expected to be bullish this week as banks and primary dealers are bent on bringing the benchmark 10-year gilt yield below the June 30 level so as to avoid booking a loss in their trading portfolios.

Moreover, banks want to cut down the depreciation losses during the one-time transfer of the gilts from SLR to held-to-maturity. Barring the negative news from the RBI Annual Report "" an upward revision in inflation, for example "" and the surge in inflation to 8.17 per cent, the sentiment was bullish last week.

Besides surplus liquidity in the banking system remains the most important reason for the yields to soften. The ten-year yield last week closed at 5.87 per cent.

On the inflation front, while some think the headline rate should moderate in the coming weeks owing to base-year effect, others feel the rise in global crude oil prices to remain a concern due to production bottlenecks in the West. Moreover, there is an added concern over the borrowing programme this week.

The ten-year yield is likely to range between 5.77-87 per cent in the coming week. This is because at attractive levels, most of the nationalised banks are likely to come out with buying offers.

In fact, most of the market players said the yield curve today was distorted with higher tenure fetching less interest rates compared to lower tenure.

This is because with drastic reduction in the duration of the investment portfolio of the banks, the trading is concentrated in the short term papers and the some selected maturities such as ten year, five years among others.

The government securities market ended the week with a bang as the yields on the government securities across maturity fell with a remarkable recovery in the price levels.

The prices in the long term papers rose by Rs 1.20 while in the medium term it gained by 50-60 paise. With this, the ten year benchmark paper has fallen by yield terms by 77 basis points since the highs of 6.65 per cent on August 11

The panic among the bankers seems to have been contained to a large extent as they seem to have discounted the high inflation figure.

Moreover, the RBI's permission to set aside the SLR in the HTM portfolio has also relieved the market players as they do not have to bother about the impact of interest rate volatility on the gilts after they a re transferred. what is worrying is that they have to provide for the losses incurred in the one time transfer.