The Hindu Business Line : Caution is watchword in G-secs market

BOND markets remained subdued as traders preferred caution towards the year-end in view of major uncertainties and absence of any direction from the Reserve Bank of India (RBI).

Traders said that among the major concerns dogging the market were inflation fears. In fact, inflation during the last few weeks has been showing a rising trend prompted by high oil prices and other commodity prices. Inflation as measured by the wholesale price index is currently in the region of 5.57 per cent. Traders said that this was triggered by high oil prices in the international market, which are seesawing between $28 and $34 per barrel during the last few weeks.

Moreover, traders said that there was hardly any signal from the RBI. During the last T-bill auction, the cut-off yields were allowed to drop to 4.17 per cent from the previous week's 4.21 per cent. The cut-off yield on the 364-day T-bill was down to 4.31 per cent from the previous auctions' 4.34 per cent.

Yet despite this softening in the T-bill rates, repo auctions continued to be done at 4.5 per cent.

As a result of these confusing signals, the 10-year yield to maturity ended the week at 5.15 per cent on a weighted average basis, slightly down from previous week's 5.17 per cent.

The 11.40 per cent 2008 ended the week at 4.82 per cent, 11.50 per cent 2011 at 5.14 per cent, 11.03 per cent 2012 at 5.16 per cent, 7.40 per cent 2012 at 5.10 per cent, 7.27 per cent 2013 at 5.12 per cent, 9.81 per cent 2013 at 5.16 per cent, 7.37 per cent 2014 at 5.14 per cent and 7.38 per cent 2015 at 5.27 per cent.

The 7.46 per cent 2017 ended at 5.55 per cent, 8.07 per cent 2017 at 5.50 per cent, 6.25 per cent 2018 at 5.71 per cent, 8.35 per cent 2022 at 5.91 per cent and the 6.01 per cent 2028 at 5.99 per cent.

During the week, the support given by the insurance companies also ensured that the yields remained stable. In fact, at the long ends, yields softened by about 4 basis points per year, though the one to 25 year spreads actually widened to about 165 basis points. Despite this slight softening and the drop in the T-bill rates few traders were willing to speculate on the possibility of major reduction in the benchmark rates. This was because most traders expected yields to soften only if inflationary trend decelerated. So far there have been no signs of any deceleration.

Besides, traders also said that there was little demand for foreign exchange from oil companies. In fact, none of the companies were even taking forward cover. Normally any large foreign currency demand triggers major yield shifts. The absence of this shift, traders said, was partly because none of the oil companies was keen to get into any forward cover arrangements or lock into current oil prices, which are considered high. Immediate requirements are being sourced from the spot markets.

The inter-government arrangements also allowed the oil companies from the necessity for getting into any futures contracts immediately. Unless there are major futures contracts, traders seldom take forward cover in the exchange markets. Traders said that such a trend implied that markets were presently comfortable with the foreign exchange situation. This comfort level is evident from the soft forward premiums. Six-month premiums are still in the sub 0.25 per cent range.

Further, most banks have been reporting major increases in credit offtake. The increases are not just for meeting the refinancing windows. Instead, there was actual increase in offtake, for meeting capacity funding requirements from some of the small and medium sector enterprises. Bankers said that this credit demand was entirely the offshoot of the retail push. In fact, yields in the short run were likely to harden further in the coming months, if the credit offtake maintained the current clip, traders said. The increase in credit offtake has pushed up the incremental credit deposit ratio of most banks close to 100 per cent.

The interest in credit stems from the fact that even after the spate of reductions in the prime lending rates between 25 and 50 basis points, bankers still expect to make spreads in the region of about 4 per cent.

Traders also said that what was powering this credit offtake was the clampdown on private placements.

In fact, some corporates that had tapped the private placements markets are also beginning return to term loan window. This was partially to meet the cost of refinancing their maturing placements with term loans. Most of these private placements were made with short-term debentures, to ride the yield curve.

But the result of this rising credit demand was not likely to lead to any large scale selling of securities, bankers said. Instead, most of them would prefer to raise deposit rates and deploy the same in credit as they are already in excess of the statutory liquidity ratios.

Consequently, bankers say that a rise in deposit rates may be necessary to meet the demand for long-term funds. Any rise in deposit rates, however, is expected to be restricted to long ends.

In fact, most of the term credit demand warrants that banks augment long-term resources. The clampdown on private placements, however, was beginning to create problems for some of the provident funds, in particular the exempted categories. Some of these funds are heavily overexposed in State-guaranteed securities. Yields on these securities have been on the rise, spreads between sovereigns and State government guaranteed loans are about 600 basis points. Spreads between top-rated corporate papers and sovereigns have also widened to about 175-200 basis points during the last few weeks during the month.

Article E-Mail :: Comment :: Syndication

Stories in this Section
SIB products for Net-based fund transfer

Reflections on scoring a century

IOB mulls branch in Gulf for NRIs

Caution is watchword in G-secs market

Banks advised to go for out-of-court settlements

Debt Tribunal holds special sitting at Karur

Plastic money is here, there & everywhere

Develop strategy for new scenario, SBI staff told

Indian Bank staff campaign