Inflation fears spur gilts unloading

The upward bias in inflation led to a selling spree in government securities today.

As a result, the ten-year benchmark yield (on the 7.27 per cent 2013 paper ) closed at 5.19 per cent against Wednesday's 5.14-5.15 per cent.

The selling spree started in long-term papers and spilled over to the medium ones as well.

In early trades, prices of long-term bonds fell by 40 paise, while the medium term witnessed a decline of 20 paise.

However, during the later part of the day, expectations of lower inflation on Friday and buying demand led to a recovery. Long term prices went up by 20 paise in the rebound.

Another factor contributing to the fall was the cautious approach adopted by the US Federal Reserve.

Even though the Fed mentioned that current interest rates will be maintained, it did not mention if they could be maintained for a considerable period.

The market interpreted this as a hint of US rates firming up in the medium term.

Some dealers are of the view that with new inflation rates expected to be made public Friday, players preferred to liquidate existing positions to make room for fresh positions.

However, they added that even if the inflation rate is likely to go down tomorrow with the base effect, prices of primary articles and oil will remain firm.

In fact, that cautious outlook on inflation with an open upward bias expressed in the currency and finance report released by the RBI added to the concern.

This led the dealers to feel that except for the base effect, there is no other reason for the inflation to come down.

They added that in all likelihood, the rate of inflation will go up by the end of the year. It is also possible that by the end of the year, the Fed revises its base rates upwards.