Bond yields may test 6.70; compression may follow

Global markets were less impacted last week inspite of a surprise result France’s presidential elections and Washington’s fresh political turbulence. The yield on the US 10-year Treasury note was unchanged while crude prices firmed modestly.

Indian markets started the week with expectations of a new benchmark to be issued. Bond prices traded in a narrow range for most of the early part of the week on lack of fresh triggers and thin volumes. Absence of fresh factors and uncertainties on rate outlook keep traders and investors away from active participation in markets.

Call market was firm mid-week close to repo rate. Overall system level liquidity continued to be robust. Short-term money market instruments yielded tad higher as investor appetite was low due to the launch of IPOs and long-dated bonds.

The other redeeming feature of the week was a drop in both the CPI and WPI over previous months. Retail inflation was at 2.99% for  April.  Food inflation was also seen as fairly lower than the previous months. Industrial production also registered a positive resurgence with a print of 2.7% for March against 1.9% the previous month. The shift in base year is possibly seen as a major reason for this improvement in both sets of data. The markets may take these as a positive signal and a longer pause on key rates will be the first interpretation from these data releases.

The new 10-year bond should test 6.70 and may trade below issue levels for some time and a likely compression of yields may follow.

The writer is executive director, Lakshmi Vilas Bank