Long-term gilts likely to look up

Outlook/GOVERNMENT SECURITIES

While the liquidity scenario remains abundant and the inflation rate favourable, the announcement of the government's borrowing programme for the first half of the new fiscal and the market stabilisation (MSS) bonds will make players review their market positions. The yield curve will see a rise in prices in the long-term as the supply of long-term papers will be a constraint as evident from the borrowing calendar.

Some firming up of yields will happen in short-term papers, especially treasury bills. With the one-day repo getting replaced by seven-day repo shortly, cash management for banks will be an issue even though there is abundant liquidity in the system.

The first half of this week, in which the fiscal will end, will witness a rally in bond prices. The second half will see a consolidation as the view on interest rates and liquidity has to be relooked at on the back of MSS bonds and the revised liquidity adjustment facility.

Last week the yield on the 10-year bonds touched 5.16 per cent on the back of a rally in gilts as the inflation rate fell further to 4.71 per cent. The general sentiment was boosted by a lower-than-expected borrowing target for the next fiscal and a central bank head's comment that he expected the government's borrowings to be smooth.

According to bond traders, the market stabilisation plan could significantly suck out liquidity from the system which had lifted the bond market sentiment this month. The government will issue Rs 60,000 crore worth of securities under the market stabilisation scheme.

Bonds mart seen active

While banks need funds for Tier-II capital, companies preferred to tap the market to fetch a better price as there are no other fund avenues in the market. The National Textile Corporation (NTC) may issue bonds to raise funds this week. Banks and public sector companies tapped the market this week to raise funds for year-end provisions. The Power Finance Corporation, Dena Bank, Allahabad Bank and Indian Railway Finance Corporation raised funds.