Rangebound session round the bend

OUTLOOK/G-SECs

Government security prices are expected to remain range-bound this week.

Players who had built up positions by buying gilts at low prices at the end of last week when the 10-year paper yield touched 5.20 per cent may turn sellers in the beginning of this week. But with players preferring to remain liquid, the trading will remain on the thinner side.

While banks are liquidating their positiions owing to the interest rate developments abroad, mutual funds are sitting tight and making no investments.

According to bankers, there have been not much purchases from mutual funds, which, in turn, has resulted in lack of redemption pressure.

Till the new inflation figures are released on Friday, the markets will remain choppy. This is because the participants don't seem to be buying the assurances on a low inflation rate by various authorities.

If Friday's figure is below 6.10 per cent, there will be a good rally in the market. However, if it remains flat, the sentiment will be marred and selling pressure will continue.

With this backdrop, the 10-year paper yield is likely to hover in the range of 5.20-25 per cent. However, if nationalised banks turn buyers of instruments at low prices, yields are likely to go down marginally.

Another factor that might lead to cautiousness in the market is the base rate hikes in some of the developed economies.

While Bank of England last week hiked rates by 25 basis points from 3.75 per cent to 4 per cent, few weeks back Bank of New Zealand had effected a similar rise. With no demand for gilts, repo rates have turned as the only viable investment option.

Despite strong fundamentals, the market looks jittery because some banks think that investments could not be made heavily in gilts to build large positions as they are not sure if interest rates could fall further for better profit selling.

This is coupled with the fact that with slow credit pick up, the liquidity situation could not be pressured much by building long-term positions.

Last week, prices of government securities declined following a base rate hike by the Bank of England which fuelled the feeling that sooner or later rates are going to firm up.

A few foreign banks have already factored in a 50 bp hike in Fed rates even though the Fed is yet to increase rates.