Bond Traders Stay Cool amid Poll Frenzy

Fun­da­men­tals take prece­dence as mar­ket is more in­ter­ested in the new Bud­get

The Economic Times - - Markets & Finance - SAIKAT DAS

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.

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