Bond prices at one-month low

MUMBAI: Bond prices dipped to a one-month low on Thursday while the rupee ended flat from its previous close. Even as Union finance minister P Chidambaram had said on Wednesday morning that the ceiling for issuing market stabilisation securities (MSS) might not be hiked, the Reserve Bank of India, late in the evening, announced that it had increased the issuance of bonds under the MSS route to Rs 1,50,000 crore, from the earlier limit of Rs 1,10,000 crore.

This announcement, coupled with global credit worries, saw bond yields closing the day at a one-month high. The yield on the benchmark bond, i.e. the 7.99% paper maturing in 2017, ended at 7.99%, the highest close since July 6.

The bond yield ended at 7.91% on Wednesday. Bonds opened the day weaker, with traders seeing the raising of the MSS ceiling as a huge dampener because it indicated larger supplies.

The threshold at which the ceiling will be reviewed in future will now be at Rs 1,35,000 crore. Consequent upon the MSS auction of dated security held as of now, the MSS outstanding will be at Rs 98,970 crore.

Rates on the inter-bank call money market remained stable on Thursday and hovered around the 6%-level. The rates ended the day at 6% after transactions worth Rs 17,304 crore were conducted. Rates in the collateralised borrowing market ended the day at 6.15%.

Transactions worth Rs 28,171 crore were carried out on the CBLO option. Banks placed bids worth Rs 38,135 crore at RBI’s liquidity adjustment facility window, which was fully mopped up by the central bank.

On Thursday, the rupee ended at 40.53/54 levels, largely unchanged from its previous close of 40.52. This was mainly because stocks in the equity market dropped on worries about the fallout from the US subprime mortgage sector.

Traders now expect the rupee to weaken and breach the 41-mark versus the dollar. This is also because of the guidelines released by RBI on Wednesday, which tightened norms on external commercial borrowings. This implied that there would be lesser inflows into the country, causing the local currency to weaken.

There was a slight upward movement in premiums at the forward market, as rates on the one-month contract ended the day at 1.96% (1.84%). Similarly, the six-month contract closed at 1.96% (1.79%) and the annual contract ended the day at 1.94% (1.82%).