Monday, October 25, 2010 17:13 Hrs IST

We Expect Bond Yields To Remain Range Bound with an Upward Bias in The Near Term

Fixed Income Market Outlook, DSP BlackRock Mutual Fund, 22 October 2010

The Benchmark 10 Yr government bond yield moved up from 7.84% pa in the beginning of the month to 8.15% pa as on October 20, 2010 on the back of tight liquidity conditions and negative sentiment ahead of RBI's credit policy.

Money market yields continued to harden driven by the tightness in liquidity and a sharp surge in funding requirement for the Coal India IPO. 3M Bank CD yield has moved from 7.13% pa to 7.85% pa month to date while the 12M Bank CD yield has moved from approx. 8.07% pa to 8.55% pa during the same period.

Benchmark 10Y AAA PSU Bond moved from 8.67% pa in the beginning of the month to 8.81% pa as on October 20, 2010 while the 1Y AAA PSU Bond moved from 7.89% pa to 8.36% pa during the same period tracking upside movement in the government securities and tightness in the money market.

The liquidity in the system continues to remain tight and is on average Rs. 70,000 cr in deficit.

Outlook

The bond market is exhibiting cautious attitude ahead of November 2, 2010 credit policy meet. Market participants are divided on views whether the RBI will hike rates or not in the upcoming policy meeting. Lack of clarity regarding the fate of the current 10 Yr bond also weighed heavily on the sentiments.

We expect bond yields to remain range bound with an upward bias in the near term. We have reduced duration in DSP BlackRock Bond Fund and DSP BlackRock Government Securities Fund as a precaution. We will look to redeploy our cash at an opportune time.