Mumbai: The bond yields ended steady on slight profit booking on Tuesday, after moving with a downside bias during the day, as lingering concerns surrounding the euro zone economies continued to fuel flight to safety.
The yield on the 10-year benchmark bond ended at 7.40%, unchanged from Monday’s closing, after moving in the 7.36-7.41% range during the day.
Volume was a robust Rs214.15 billion ($4.5 billion) compared with Monday’s Rs169.55 billion on the central bank’s trading platform.
“Global factors are clearly dominating on the far-end. But shorter-end (yields) have moved up reflecting the liquidity concerns are causing flattening of the curve,” said Vineet Malik, head of rates at HSBC Bank.
US treasuries rallied with investors seeking the safety of government debt on worries about health of Europe’s banking sector following the weekend bailout of a Spanish savings bank.
The benchmark 10-year Treasury note was trading at 3.13%, down from 3.20% late on Monday, but off one-year lows of 3.06% touched earlier in the day.
However, concerns of tight liquidity next week on account of Rs677 billion of payment towards third-generation (3G) mobile spectrum sales and incessant domestic supply limited the fall in yields.
“Currently, rally is restricted to the longer-end. Till now, global factors are by-and-large supporting, but so much (rally) has happened, that there are fears of correction,” HSBC’s Malik said.
The banking system has a surplus Rs400 billion and the 3G auction outflow may push the system into a deficit cash mode next week, dealers said.
Dealers expect bonds to take cues from the euro’s moves overnight on Tuesday. Overall, no major upside is seen on yields amid global uncertainty.
The benchmark 2020 bond is seen trading in 7.40-7.45% on Wednesday, dealers said. “Safer bet right now is to be at the short-end as liquidity tightness has been factored in at the short-end. If it materializes, then the market has already factored (that) in and if it doesn’t, then there could be a rally,” Malik added.
Also, the fall in oil prices added to the bullish sentiment as lower crude prices eases pressure on inflation.
Oil extended a drop towards $68 on Tuesday on growing concern that Europe’s debt crisis would derail the global economic recovery, prompting investors to sell riskier assets in a flight to dollar safety.
The benchmark five-year interest rate swap ended at 6.28/32%, from the previous close of 6.36/39%. The one-year swap ended at 4.93/96% compared with previous close of 4.93/95%.
In interest rate futures on the National Stock Exchange, the June contract implied a yield of 8.2027%, while the September contract was not traded.