10-Year yields to move within 8.23-8.35% band

Last week, the IIP print surprised on the upside and RBI announced a larger T-bill auction size for May and June 2011. With liquidity still in deficit, and the relentless supply of SLR bonds this fiscal (including significant supply of short-end CMBs and T-bills), Friday’s bond auction showed some signs of strain.

The benchmark 10-year bond saw a lower than usual bid-cover ratio, with a higher than expected cut-off yield of 8.29%. Commodity prices continued their recent sharp fall the last week. Nymex crude futures closed below $100, giving some (somewhat premature) hopes of relief on the Indian inflation and fiscal fronts, and will be watched closely going forward. April WPI will be released on Monday.

Market expectations are at 8.40%, with a risk on the upside. The market will also watch for a roadmap for hikes in domestic diesel, kerosene and LPG prices, following the petrol price hike over the weekend. With a liquidity shortfall of about Rs 50,000-55,000 crore post auction outflows, and with government WMA at about Rs 25,000-30,000 crore, expect overnight MIBOR to hover around 7.50% this week. Expect the 10-year bond yield to move in the 8.23-8.35% range into Friday’s auction.

(Ananth Narayan, MD & REGIONAL HEAD-FICC, SOUTH ASIA Standard Chartered Bank)