During the last fortnight, the secondary market averaged daily volumes of about Rs 183 crore with most trading occuring the day after a primary issuance. Trading is practically non-existent beyond three months security, and therefore there is no benchmark treasury bill yield curve in this segment, the report said.

"Over the next fortnight, short-term liquidity is expected to improve, but the positive impact could be countered by volatility in the foreign exchange markets. We expect treasuries to maintain current yields," the report said.

Based on an analysis of the government's borrowing programme, the overall liquidity in the system appears comfortable even to support any overshooting of the planned fiscal deficitas well as commercial credit demand, the report said. "However, we do not expect a bull run till October, as the ongoing borrowing programme will continue to exert pressure on yields," the report added. The net government borrowing programme has been completed to the extent of Rs 37,700 crore against the total budgeted programme of Rs 48,326 crore.

The Indian Yankee bonds managed to hold on compared with the large slide in the prices of Yankee bonds issued by other Asian countries this week, the report said. "With the currency coming under pressure, Asian Yankee bonds fell sharply during the fortnight. Indonesia had to reschedule a sovereign loan and amidst market fears of a default, the spreads over the US treasury have touched triple digits. India has escaped the carnage and the ICICI 2007 Yankee bond has been fairly steady, though on thin volumes," the report said.

The spread on the 7.5 per cent ICICI 2007 Yankee bond remained at 450/420 basis points this fortnight compared with 460/420 basis pointsthe fortnight ending July 30. In contrast, the spread on benchmark Korean, Thai, Malaysian, Indonesian and Philippines Yankee bonds increased by 150 to 250 basis points.

Another run on the rupee, like the one witnessed this week, cannot be ruled out because of the hardening forward premiums and developments in the Asian currency markets, the report said. "The six-month forwards were quoting at 8.7 per cent on August 14 compared with an average of 7.4 per cent in the first week. NDF spreads over on-shore forwards have also widened; six-month premiums were around 13 per cent. The fallout of a run on other Asian currencies could affect the rupee over the next fortnight," the report said.