Liquidity to drive up yields

Outlook/ Government securities

 In fact, contrary to the general belief that yields in the market are going to go up after the 25 basis points higher cut-off rate announced by the Reserve Bank of India in the last auction of 6.01 per cent 2028 paper, the market recovered.

 Buying demand came into the market and is expected to continue for some time as banks and mutual funds will buy gilts, at least in the early part of the week.

 The later part of the week might see some selling as banks will try to stay liquid to meet quarter-end profit norms.

 Liquidity will be the main driver for government securities as, despite the higher inflation figure and the higher cut off last week, buying demand helped pick up prices.

 However, the market is divided on the expected movement of the ten-year benchmark paper yields. While some feel it will remain high in the range of 5.20-30 per cent, with an upward bias, some hold the view that it might come down to 5.12-5.15 per cent due to buying demand from across the market.

 Last week, gilt yields continued to move higher with selling pressure dominating the market. This was because, with no major triggers, market players were wary of building up heavy positions.

 This was because, with uncertainty in the long-term outlook in interest rates, they will have to sit on built up positions. Therefore, though there has been trading in the market, it is rather thin and cautious.

 The ten-year bond yield reached 5.25 per cent, although, towards the end of the week, it settled around 5.19 per cent on the back of a liquidity-driven rally.