Government Security Market:
Update Market was well positioned for a target of 7.75 per cent but the MSP hike in the khariff has led to the sell off as it may adversely affect the CPI numbers and it may increase roughly by 50 bps. The Government decision to hike Minimum Support Price (MSP) came at a wrong time as it may dent economic activities and may force the Reserve Bank of India to hike the rates earlier to control the rising CPI numbers. Earlier during the week the RBI sold 5 to 10 year state loans in the range of 8.48 to 58 per cent. Also sold 91; 182 & 364 DTB at a yield of 6.4805; 6.9083 & 7.1663 per cent respectively. In a weekly auction the RBI sold 6.65 2020; 7.59 2026; GOI FRB 2031; 6.5 2033 & 8.13 2045 at a yield of 7.6218; 8.1741; 7.8902; 8.17 & 8.17 per cent respectively.
The yield on the 7.17% government bond due May 2028 fell to 7.8705% from last week level of 7.9028% .
Global Debt Market: Update
U.S. 10 year Treasury yield fell to its lowest level in nearly six weeks on Friday after U.S. data showed slower than expected wages growth. Data on Friday showed average U.S. hourly earnings gained 5 per cent or 0.2 per cent in June after increasing 0.3 per cent in May. This pointed to moderate inflation pressure that dented expectations that the Federal Reserve would raise interest rates a total of four times in 2018. The wages components has been the focal point for the market for a while now, rather than the non farm payrolls, and the dollar slipped accordingly. The flattening of the U.S. yield curve, perhaps reflecting worries about the economic impact of trade conflicts. The spread between the two and ten year yields was at its flattest in 11 years.
Bond Market Ahead:
Market will be under pressure due to weaker rupee against US dollar; higher crude oil prices and upcoming CPI and IIP numbers. CPI expected to inch above 5 per cent in this month versus 4.87 in the last month on account of higher food prices and crude oil. Absence of OMO Purchase is mounting up the pressure on the market and may push the yield above 7.92 levels in a near term. Currently the Indian 10 year benchmark is at a spread of above 500 bps from US 10 year treasury yield. Spread is quite attractive and may attract the FIIs to stay invested in Indian market .
Bond Strategy :
* Buy 7.17 GOI around 7.92/90 with a target of 7.82 and a stop loss of 7.97 levels
* Buy 10 Year SDL in auction .
Yield Outlook for the week
10 year Benchmark 7.17% GOI 2028 likely to move in the range of 7.82% to 7.92% levels.
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