Gilt prices seen firm

OUTLOOK/G-Secs

Government security prices may remain strong and range-bound this week.

According to dealers, a further fall in the inflation rate is unlikely as besides a base effect, article prices are ruling high.

Oil prices have gone up as crude prices have touched the post-Iraq war high of $37 a barrel. Domestic steel prices are rising owing to a hike in raw material prices and most of the raw materials are imported.

The beginning of the week might see some selling pressure from players who had built positions by buying gilts at low prices towards the end of the last week expecting the inflation to rule at around 5.60-5.65 per cent.

The sliver lining for bond traders has been the payroll data released by the US. As against an expectation of 25,000 jobs, the data show that only 21,000 jobs were created.

This has generated a feeling that the base rate in the US will not be revised upwards for the time being and the soft rate bias will continue.

This trend also provides an assurance at least till the end of this month as they will not book depreciation for the year end.

While this remains a positive trigger, the market is keenly waiting for the market stabilisation bonds which may hit the market before strong inflows through the redemption of the 12.50 per cent 2004 paper arises.

Moreover, fresh buying will be countered by the fact that major purchasers such as banks will prepare for advance tax payments.

On the other hand, buying pressure is likely to surface and leading the pack will be public sector banks with huge housing finance portfolios.

According to market dealers, buying demand will push down yields. Banks are currently running losses in their trading book.

Attributing this to thin trades, dealers said banks have closed their "held for trading" portfolio in anticipation of a depreciation in the year end. This may make trading in gilts profitable before the year ends.