Bond Review: Rajesh Sharma Money Matters Financial Services Limited

Bonds end off lows on better-than-expected OMO result

Government bond prices ended off intraday lows as a strong outcome of the Reserve Bank of India's bond purchase auction, announced towards the end of the session, lifted market sentiment. The central bank bought four gilts worth 111.94 billion rupees as against the notified amount of 120 billion rupees.

Market players had expected the RBI to buy bonds worth around 105 billion rupees. The benchmark 8.79%, 2021 bond settled at 101.79 rupees or 8.51% yield as against 101.87 rupees or 8.50% yield Thursday. The 9.15%, 2024 bond ended at 104.62 rupees or 8.54% yield as against previous close of 104.72 rupees or 8.53% yield. Bond prices recovered also due to the higher-than-expected cutoff prices set at the open market bond purchase auction. The RBI set a cutoff of 98.84 rupees or 8.40% yield on the 8.19%, 2020 bond, 104.73 rupees or 8.53% yield on the 9.15%, 2024 bond, 96.00 rupees or 8.74% yield on the 8.26%, 2027 bond and 101.95 rupees or 8.76% yield on the 8.97%, 2030 bond. Market players did not expect the RBI to buy the 8.26%, 2027 bond. Sentiment improved intraday also because the cutoffs set at the government's debt sale were largely in line with expectations, contrary to view that auction may attract weak demand. The government sold 40 billion rupees worth of 8.24%, 2018 bond, 60 billion rupees worth of 8.79%, 2021 bond, 20 billion rupees worth of 8.28%, 2027 bond, and 30 billion rupees of the 8.33%, 2036 bond. The RBI set a cutoff of 98.94 rupees or 8.47% yield on the 8.24%, 2018 bond, 101.70 rupees or 8.52% yield on the 8.79%, 2021 bond, 95.83 rupees or 8.78% yield on the 8.28%, 2027 bond and 94.35 rupees or 8.90% yield on the 8.33%, 2036 bond. Intraday, some traders had sold aggressively on view the cutoff yield on the 8.79%, 2021 bond may be 8.53-8.54%. The 8.79%, 2021 and 9.15%, 2024 bonds fell the most intraday on concern over the liquidity of both the papers in

coming weeks. However, bond prices were moving in a narrow range as traders avoided big positions before the release of outcome of the RBI's bond purchase auction. At the end of session, government bonds and Treasury bills worth 85.80 billion rupees were traded as against 117.05 billion rupees on Thursday.

Outlook:

Bonds may weaken marginally on uncertainty over the central bank's bond purchase plans for the week. The 8.79%, 2021 bond may find support as traders believe the RBI may select the paper if it decides to conduct a bond purchase auction next week. Rajesh Sharma CMD Money Matters Financial services said Traders will eye the borrowing from the RBI's repo auction to gauge the liquidity deficit in the system, which is seen as a key determinant for the RBI's bond purchase plans. Intraday, bond prices are expected to move in a narrow range as traders may be unwilling to take big positions before the government announces the details of weekly gilt auction. Yield on the benchmark 8.79%, 2021 bond is seen moving in 8.50-8.55% band.

by: Kiran K.

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