Wednesday, February 05, 2014

Fab Start to Feb for India G-Sec

Continuing from my last post See-saw January for India GSec, the short term target of 8.70% has been already met thanks to INR stability, better than expected spectrum auctions and easing off in global yields.  Though the underlying story of supply-demand is still in place for the current quarter, I do not see large invetor interest coming in to longer term G-Secs. Difficult to see investors taking on duration risk when 10Y yield is at 8.70%(though annualized rate would be 8.89) while 1Y yield is at 8.97% .

This is not to say 10Y yield cannot go below 1Y yield or any shorter term yield, but just that it is possible only when we are in the cusp of a rate cut cycle beginning. With most in the market not calling for a rate cut in the immediate future, an inverted yield curve leaves nothing for investors to continue in the longer duration papers.  To be fair, mutual funds have been consistent sellers in the last fortnight with that section of the market alone selling close to INR 9000 Cr since 20th January. How much of that selling is owing to redemption pressures and how much is owing to fund managers' view on the market remains to be checked with data.

Short term range I see for 10Y G-Sec is 8.65%-8.80%. Range play recommended.

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