Last week, gilt yields reversed previous trends

Last week, gilt yields reversed previous trends and closed on the lower side, helped by a fall in global oil prices, speculations of a pause in US Fed rate hike and on hopes of steady interest rates at the RBI policy review.

At start, a sharp surge in oil prices following intensifying tensions in the Middle East weighed on the market. Speculations of oil touching $80 a barrel in near future triggered selling. Also, a lack of participation and impending fresh supplies added to the woes and kept gilts under pressure.

However, a steady fall in oil prices and the Fed chairman’s dovish statements on US rate hike cycle set good buying interest and gilts rallied smartly.

Also, finance minister P Chidambaram’s comments that interest rates could moderate if inflationary expectations are dampened spurted gilts prices further. The yield on 7.59% 2106 fell 10 bps to 8.24% from 8.34% previously.

Gilts market may draw comfort from reduction in the auction size by Rs 1,000 crore to Rs 4,000 crore (7.55% GoI 2010 auction on July 27). In absence of any rate hike and negative surprises, gilts could rally further.