Mumbai, July 2: Government bonds perked up today after figures showed a modest decline in the inflation rate.

The gains came a day after an initial rush turned into a late selloff, largely due to concerns that price pressures would intensify. However, the tide turned this afternoon, when banks saw their worries over prices and the impact of Wednesday’s Fed rate hike, fade away.

Bond markets took as a pleasant surprise the fresh batch of figures that showed that the rate of inflation eased just a bit to 5.87 per cent for the week ended June 19. The drop, from 5.89 per cent the week before, was based on numbers that left out the rise in coal prices. Markets were fearing a spike to 6.10-6.15 per cent.

The rush for bonds sent the yield on the benchmark 10-year security dipping to an intra-day low of 5.79 per cent after an opening level 5.84 per cent. There were some creased brows when it became apparent that the data did not include coal. This led to a selloff, which drove down prices and pushed up the 2014 gilt yield to 5.82 per cent.

A senior official from a leading public sector bank said bond prices did recover later with the yield settling at 5.78 per cent against its previous close of 5.84 per cent.

“Markets were worried about the inflation numbers and the US Federal Open Markets Committee’s decision on interest rates. Once these questions were answered, bond prices looked up,” the official added. Analysts feel that future direction on interest rates and prices will be influenced by next week’s budget.

U. Venkatraman, head of forex and money markets at IDBI Bank, told The Telegraph that the underlying sentiment is one of caution. There will be no replay of the bullish fervour seen in the past. “The feeling is that interest rates have bottomed out and the rise overseas will spill over to India, with a time lag.”