Government bond trading surges to record high
Trading volumes in government bonds market rose to a historic high on Thursday as both foreigners and domestic investors lapped up securities in anticipation of faster interest rate cuts than what the Reserve Bank of India signaled at.
Total traded value of government bonds was at Rs.1.23 lakh crore, the highest ever, compared with the previously recorded Rs. 92,000 crores on 18 thApril.
Higher yields compared with other developing markets such as South Korea, or China, the government's efforts to lure foreign investors with lower taxes and higher limits, and the opportunity to have capital gains as yields fall are the main draw for investors. Bond prices and yields move in opposite direction.
"There was a decent rally in the market today," said Ajay Manglunia, head, fixed income, Edelweiss Financial Services, "When there is profit to be made, people make profits and re-inter into new positions."
Indian government bond yields fell to three year low as traders expect sharp interest rate cuts in the coming months despite the Governor Duvvuri Subbarao saying that there is limited room for him to lower the key interest rates. But investors believe that the growth rate is so weak, that the governor will not have a choice than lowering it quickly. Furthermore, inflation may fall sharply in coming days, probably even shooting below the RBI's target of 5% for the year as companies lose pricing power. Consumer prices which is rising at double digits, may also ease as commodity prices are falling across the globe.
Yields on ten year bonds fell to near three year lows of 7.61%, declining by 9 basis points from the opening yield. One basis point is one hundredth of a percentage point. Yields on the benchmark bonds have softened by almost 39 basis points since January this year to 7.61% from 8%.
"We have seen volumes pick up in April and May," said official from Clearing Corporation of India Limited, "Largely due to the interest rate view traders have taken and increasing reach and ease of use of the common trading platform(Negotiated Dealing System-Order matching) for most traders. This has allowed transparent pricing for them".