Monday, April 20, 2009

[Investors Please Listen] Bond Vector - Market sentiment remains positive on policy eve; 10-year closes at 6.39%

Market sentiment remains positive on policy eve; 10-year closes at 6.39%    

n               After posting a week of secular rally, the sovereign bond market opened on a back-foot today; 10-year 6.05% 2019 opened 6 bps above its previous close on the back of the announcement of INR 80 bn auction in 6.05% 2019 after market hours on April 17. However, the pessimism was short–lived, as participants saw this as a good entry level; the benchmark yield fell to intraday low of 6.34%.

n               Unlike previous week, buying was not cemented by high volumes. Participants preferred to tone down their activity prior to annual monetary policy announcement scheduled for April 21. As participants preferred to stay light and book profit prior to the policy, the benchmark lost intraday gains and closed at 6.39% for the day.

n               Surplus funds continued to get channelized to safer investment avenues as bids received and accepted under the reverse repo sustained over the INR 1 tn levels. Volumes dipped in the overnight money market on the back of dip in trades in market repo and call market; weighted average rate was at 2.83%.

n               In the Annual Policy Review 2009-10 (April 21), we expect the apex bank to leave all key rates unchanged and assign high probability to imposing cap on reverse repo. The market is expected to react positively to this, and the 10-year 6.05% 2019 is likely to test the 6.25% levels.

n               A day prior to the policy, the non-SLR market witnessed lackluster trading. Vijaya Bank was the only issuer in the CD segment raising INR 2 bn at 4.95% for 6-month maturity. Bonds trailed the sovereign debt; though the 10-year quasi-sovereign debt eased marginally, to 8.49% levels, it failed to sustain at those levels as it closed at 8.53% (near previous close) for the day.


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