No one was expecting a bond rally because this year the government was going to borrow hand over fist so bond prices have only been falling and yields rising, but things have changed in the last two weeks.
Now, bond prices are at seven-week highs. The latest trigger is the bond auction on Friday.
The demand was very good for the three bonds on offer. The surprise was that the government did not take the extra money through a greenshoe.
The government cancelled about 33,000 crores of auctions in the last two to three months because dealers were asking for too high yields. So, when the money was coming, traders were expecting that the government would opt for the greenshoe. However, that was not there. This indicated that the government also is extremely confident that tax revenues are robust and therefore they don't have to borrow the cancelled amount.
ALSO READ | Fiscal deficit likely to be 6.1%; see Balance of Payment surplus despite high oil prices: Citi South Asia
That is the belief with which the market is proceeding. In fact, there are some who believe that even in the second half, the government may borrow a little less than the budgeted amount and that is what is responsible for this rally in the bond markets.