Bond yields off highs after inflation bangs on the expectation at 9.22%

16 Aug 2011 Evaluate

Pre WPI data Scenario:

Bond yields rose as strong factory data on Friday strengthened expectations of a rate hike by RBI in its monetary policy review scheduled to be held on September 16, 2011. However, the yields also rose as the investor’s adopted a cautious approach ahead of the release of July's wholesale price index data. The expectation was that India's benchmark wholesale-price inflation for the month will fall around 9.2 percent, staying above 9 percent for eight straight months.

On the global front, Most U.S. Treasuries were stable on Monday, while long bond prices dropped, as stocks recovered and investors looked for signs of stability after a volatile week whipsawed prices and sent buyers scurrying to US government debt. Oil rose more than $1 a barrel on Monday, supported by hopes, European leaders will come up with solutions to the region's debt crisis and by broader gains in global markets.

The yields on 10-year benchmark 7.80% - 2021 was trading higher at 8.34% from its previous close of 8.30% on Friday as, with traders eyeing the July inflation numbers due 12.00 noon for furthur cues The benchmark five-year interest rate swaps were trading at 6.93% from its previous closing of 6.83% on Friday.

The Government of India has announced the sale of three dated securities for Rs 10,000 crore on August 18, 2011, which includes, (i) “8.07% Government Stock 2017” for a notified amount of Rs 3,000 crore (nominal), (ii) “8.08 percent Government Stock 2022” for a notified amount of Rs 4,000 crore (nominal) and (iii) “8.28 percent Government Stock 2032” for a notified amount of Rs 3,000 crore (nominal) through price based auctions.

Post WPI data Scenario:

The rate of inflation, based on monthly WPI stands in line with the street expectation of 9.22% for the month of July 2011 as compared to 9.44% seen in the previous month and 9.98% during the corresponding month of the previous year. Build up inflation in the financial year so far was 3.01% compared to a buildup of 3.45% in the corresponding period of the previous year.

The yields on 10-year benchmark 7.80% - 2021 was trading at 8.29% from its previous close of 8.30% on Friday.The benchmark five-year interest rate swaps were trading at 6.88% from its previous closing of 6.83% on Friday.

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