Tuesday, August 10, 2010 14:17 Hrs IST

Benchmark 10Y Bond to Trade Between 7.60% To 7.90% pa In the Near-Term

DSP BlackRock Mutual Fund's Debt Market Views

We expect government bond yields to remain range-bound with an upward bias in the near-term. Tight liquidity conditions and higher inflationary expectations should exert upward pressure on the government bond yields while improving government finances and uncertainty in the global economy will push them lower in the medium term. Market participants are expecting the RBI to hike both Repo and Reverse Repo Rate by atleast 25 basis points in its upcoming policy review on September 16, 2010. We expect benchmark 10Y bond to trade between 7.60% to 7.90% pa in the near-term. We also expect the RBI to maintain a somewhat tight liquidity environment to keep a check on inflation.

We expect a high amount of primary market supply from the borrowers to keep the money market yields elevated. 3M Bank CD yields can be expected to touch 7.0% pa in the near term while 12M Bank CD yields can touch 7.5% pa.

We believe that the risk-averse investors should remain invested in the short-duration, high quality fixed income funds such as DSP BlackRock Money Manager Fund, DSP BlackRock Floating Rate Fund and DSP BlackRock Liquidity Fund. Investors with some risk appetite for government bonds should consider investing into DSP BlackRock Bond Fund and DSP BlackRock Government Securities Fund with an investment horizon of 6-9 months.