Bonds rally, banks recover some losses

The bond market staged a rally on Friday and the yield on the 10-year benchmark 7.37 per cent 2104 paper closed at 6.08 per cent. The yields on government securities, across maturities, fell with a remarkable recovery in prices. The prices of long-term paper rose by Rs 1.20, in the medium-term the gain was 50-60 paise.

With this, the yield on the 10-year benchmark paper (7.37% 2014) has fallen by 56 basis points (one basis point is one hundredth of a percentage point) over the last fortnight between August 11 and August 27. The price of the 10-year paper rose by 3.45 per cent during this period, from Rs 105.75 to Rs 109.40. In the bond market, prices and yields move in the opposite directions.

With the rise in prices, most of the commercial banks have been able to recover some of their notional losses in their gilts portfolios. "The value of government securities held by commercial banks was eroded by over Rs 55,000 crore in the second week of August. The price rise has reversed the trend "" the erosion now could be about Rs 35,000 crore," said a banking sector analyst.

The market rally was triggered by statements made by RBI Governor YV Reddy who saw no need to constrain demand because a supply shock was mainly responsible for the recent spike in inflation.

The impression that from next week, the inflation rate will gradually soften with a substantial base effect impact, also added to the positive sentiment.

"I expect more stability in the market from next week and volumes will also improve. Barring unforeseen events, the yield movement also depends on the inflation figure to be released next week," said G Narayanan, general manager, Bank of India.

Dealers said some amount of buying was expected next week by the nationalised banks, which have been staying away from the market apprehending they will have to book a loss in their gilts portfolios.

A section of the market, however, feels that with a scheduled auction of around Rs 10,000 crore slated to be held next week, the rally may not last long.

Market players also feel the RBI governor was sending a subtle message to prepare the market for interest rate movements, either way.