The two-week rally in government securities came to a halt on last Friday after the Centre announced that it would convert Rs 20,000 crore worth of special securities into four dated government securities.
The benchmark 7.40 per cent 2012 paper, which was last dealt at a new lifetime low yield of 5.97 per cent on January 2, finished the week at a yield of 6.03 per cent.
Similarly, the benchmark five-year corporate bond, which Wednesday was dealt at a new lifetime low of 6.12 per cent, closed the week at a higher yield of 6.16 per cent.
The rupee, which wound up on last Monday at a new 12-month peak of 47.9375/9400 to a dollar, finished last week at 48.0000/0075. Easy liquidity drove the government securities market last week. That the market is flush with funds can be gauged from the fact that overnight call money rates averaged below the repo rate of 5.50 per cent.
Call money, in fact, closed at 5.00-5.40 per cent on Saturday. Since December 26, 2002, when the Reserve Bank of India (RBI) relaxed the norms pertaining to cash reserve ratio, yield of the benchmark 10-year paper has declined by around 40 basis points.
The conversion of the special securities into the 5.73 per cent 2008 gilt worth Rs 4,000 crore, 5.87 per cent 2010 gilt worth Rs 5,000 crore, 6.25 per cent 2018 gilt worth Rs 6,000 crore and 6.35 per cent 2020 paper worth Rs 5,000 crore set off fear among market players that the central bank may press an open market operation to stop the sharp decline in gilt yields.
However, a section of the dealers pointed out that the coupon rates at which the conversion has been done is market related, thereby implying that the RBI, per se, is not averse to the decline in yields but only the pace of the fall.
There is also an expectation that the central bank may cut the repo rate. In the backdrop of huge liquidity inundating the banking system on account of the central bank
