Bond Traders Stay Cool amid Poll Frenzy
Fundamentals take precedence as market is more interested in the new Budget
A sense of political optimism may be driving the equity markets, but the government bond market isn’t all that enthused, going purely by economic fundamentals rather than any kind of exuberance. Instead, bond traders are focusing on the new government’s first Budget for future policy cues. While the BSE Sensex has shot up nearly 1,500 points in the last three trading sessions, it’s business as usual in the quiet bond market. In fact, in the last four trading sessions, the benchmark government bond yield, which moves inversely to prices, closed in the range of 8.738.79%. On May 8-12, the benchmark yield increased five basis points to 8.79% from 8.75%. “Bond is more of an economic fundamental and that’s why the impact of exit polls is muted. Higher retail inflation also diminishes the prospect of any near term rate cuts,” said NS Venkatesh, executive director, IDBI Bank. “Essentially, positive sentiment always impacts the equity market first, then the currency market.” Retail inflation as measured by the consumer price index (CPI) in April increased for the second month in a row touching 8.5% compared with 8.3% in March this year. The benchmark yield on Tuesday rose six ba- sis points, or 0.69 percentage points, to close at 8.79%. Going forward, given the El Nino threat, it seems quite possible that inflation numbers will continue to remain high, Care Ratings said in a report. On Monday, a slew of exit polls indicated a clear majority for the BJP-led National Democratic Alliance (NDA) government at the Centre, with Narendra Modi helming it. “GSec markets will primarily be steered by liquidity, supply of securities and macro numbers like inflation, growth and the current account. We don’t believe that any expectation along the lines of poll results will be driving the bond yields,” Rahul Goswami, chief investment officer, fixed income, ICICI Prudential Asset Management, said. “However, bond markets will keenly wait for the new government's first Budget to take future calls.”
The government securities market currently appears to be the only avenue for many institutional investors as private bond issuances have dried up significantly due to changes in the Company Law. RBI is selling .` 16,000-20,000 crore government bonds every week.
Moreover, government bonds worth about .` 75,000 have come up for maturity between April (.`40,000 crore) and May (.`35,000 crore). Hence, investors now have money to invest.
Overnight rates have shot up to around 9%. Both the inter-bank call and collateralised lending and borrowing obligation (CBLO) have touched 9% from 8.25-8.50% some days earlier. This aids firming up of yields.