Bonds: Differentials between yields and funding cost attractive

By Sandeep Bagla

Government bonds are likely to rally further this week and the 10 year benchmark bond may trade in the range of 7.40%-7.50%. Bonds of longer maturities could appreciate more, thereby compressing the yield curve spreads. The yield curve had built-in rate hikes at an aggressive pace, which are now more unlikely to materialise on the face of renewed weakness and uncertainties in global economies.

Global factors for bonds are turning bullish. Inflows from 3G auctions and speculation on increase in FII limits for Indian debt should keep the sentiment upbeat in local bond markets. The differential between bond yields and funding cost are extremely attractive from a historical perspective. While inflation readings remain at elevated levels, the outlook is getting tempered as commodities, including crude oil are looking to drift lower. There is an outside chance that an yield-based auction in a new five-year bond is announced, which could spur further demand in bonds and reset yields at lower levels in the segment.

(The author is Head of Trading, ICICI Securities PD)