What triggered rally in bonds?
A combination of factors including the Reserve Bank of Indias bond purchases from investors, aversion to buy short term corporate securities, and softer crude oil prices have triggered a much-awaited rally in the sovereign bond market, which could well add to lenders treasury gains.
The benchmark yield on government bonds have fallen about 30 basis points over a month amid rising trade volumes. The gauge ended at 7.93% Monday, down from September peak of 8.23 percent. Bond yields and prices move in opposite directions.
"A combination of factors has lifted investor confidence,” said Piyush Wadhwa, head of rates trading at IDFC Bank. "RBI's open market purchases has created additional demand for government bonds as market participants look for more trading opportunities, especially when the market is not sure of the timing of the central bank's next rate increase."
Bond prices have rallied reversing their trend as the central bank infused more funds into the banking system by purchasing bonds. It declared it would buy Rs 36,000 crore in aggregate in October. The Reserve Bank of India has kept the market well-oiled with July-October bond purchases at Rs 76,000 crore in total.
“Trading activity has gone up in the government bond market over the past five-six weeks,” said Ajay Manglunia, executive vice president, Edelweiss Financial Services. “Trading volumes have increased over the period with factors like softening oil prices, status quo on rates in the last MPC review.
Daily trading volumes are now in the range of Rs 20,000 and Rs 35,000 crore compared with Rs 10,000-20,000 range one and a half month ago, dealers said.
Global crude oil prices have dipped 7.6% since October 03 after Saudi Arabia and other oil producers promised to raise output to offset the likely loss arising from the sanctions on Iran.
Investors also find fancy when other instruments go out of favour.
“RBIs status quo on rates alongside OMOs, lower oil prices, and a stable currency over the past few sessions have all contributed to some easing in bond yields,” said Suyash Choudhary, head-fixed income at IDFC Mutual Fund. An undershoot in the last CPI reading has helped as well.”
According to Naveen Singh, head of government securities trading at ICICI Securities PD, some banks including public and private see it an opportunity to trade more as they aim to increase their treasury income amid improving market sentiment.