Longer securities set to draw trading interest, others seen rangebound

OUTLOOK/G-sec market

The government market will see good trading interest at the long-end of the yield curve this week.

Yields on long-dated gilts are expected to ease by about five basis points even as the medium and short-tenor gilts will remain rangebound.

Besides good liquidity, the main trigger that will nudge down the yields is the fact that inflation has remained under 5.50 per cent (at 5.38 per cent in the week ended December 6 as against 5.25 per cent in the previous week).

Moreover, the expectation of provident funds deploying a part of the estimated Rs 8,000 crore special deposit scheme interest proceeds in the gilts market will also bring down the yields.

The market is also drawing comfort from the Reserve Bank of India governor's statement that the country's burgeoning reserves will act as a cushion against any rise in oil prices, and that the central bank is keeping a close watch on inflation.

The mid-long/ long-dated gilts, i.e., papers having residual maturity of 15 years and above, rallied smartly by Rs 1.50-Rs 2.00 last week.

This week, however, profit booking will see prices of these papers nudge up only by 20 to 30 paise.

The benchmark 7.27 per cent 2013 gilt, which ended last week at an yield of 5.13 per cent, could test the 5.10 per cent yield level. However, profit sales will pull the yield back to the 5.13-5.14 per cent level.

The 7.37 per cent 2014 gilt is expected to emerge as the new benchmark 10 year gilt in the new year.