Yields may trade closer to 7.25%

In a truncated, Christmas mood and holiday ridden week, there was not much of lull in the market. And each passing week still looks like the last. Fundamentally there was nothing much to write home about, but investor sentiment is palpably getting worse by the day. A seemingly innocuous statement by the US Treasury secretary set the tone for pessimism – with equities yet again selling off and Treasury yields dropping to nine-month lows.

The investment-grade bond segment saw some volatility which was mostly driven by year-end portfolio rebalancing. Indian equity markets clawed back the previous week's sell-offs, currency remained stable but bond yields, however, ended the week sharply higher on news of large farm waiver.

While one expected the quarter-per cent US Fed's rate hike, the accompanying comments continue to rattle markets. The statements appear to suggest uncertainty and worrisome pointers to growth momentum. Adding fuel to fire was Treasury's Mnuchin statement when he said through twitter that "he had conferred with executives of the nation's largest banks that there was no liquidity crisis and all was well". By raising a pre-emptive assurance when one thought all was indeed well, his assurances wrought an opposite effect.

Markets could well open in the new year with cautious optimism. To take a balanced view without emotions, one would note that neither economists nor financial analysts share the pessimism that investors do. It is, therefore, more than likely that the market sell-off has been overdone. In other developments, US-China tensions had been abating but resurfaced on espionage rumours. The volatility is just not confined to prices but also to the quality of news on the twitterati. Trumps week-end tweets are assuring enough. Data releases appeared to have little impact on markets as the government shutdown was forcing some delays in data reports.

Indian markets continued its good run into the past week. Bonds remained well bid until Thursday. Equities inched up and one may have thought the magical 11000-mark in the Nifty index must have have been surmounted. The rupee traded with a strengthening bias, more a function of a weaker dollar in overseas markets. What however soured the weekend was the sell-off in bonds post auction results on Friday. While the auction was well bid and the cutoffs came as expected, it was some news about the quantum of budgetary allocation that may need to be allocated for farm waiver. The numbers are all over the place with estimates ranging from Rs 1-3 lakh crore. While there is not much of clarity, it clearly is a sentiment-dampener. Bond valuations may suffer hard if this sell-off continues.

Spreads continue to lag the sharp bond rally. State development loan papers and triple-A bond yields continue to remain sticky and the compression in yields which would have been an endorsement of a change in sentiment is missing. The 10-year bond should range between 7.25-7.45 with a bias to trade closer to the lower end of the range.

RISING PRESSURE

• Spreads continue to lag the sharp bond rally
   
• Bond valuations may suffer hard if sell-off continues

The writer is a market expert