The Hindu Business Line : Party time seems to be over for PDs — As longs turn illiquid, focus moves to corporate debt

THE party may well be over for primary dealers in debt securities. With the financial year nearing to an end, a number of them are bracing themselves to deal with a significant erosion in their portfolios, ranging anywhere between 15 per cent and 30 per cent.

According to sources, a number of PDs who are sitting on portfolio sizes in the range of Rs 2,000 crore to Rs 3,000 crore, have a considerable portion constituted by illiquid long-dated papers, bought at high prices.

Officials with leading PDs in the country confided that most of the holdings in long-dated papers, would suffer a depreciation of Rs 8-10 as of March 31. "In October last year, some market participants offloaded their long-term securities, taking advantage of the buying interest in the market. On October 15, when the yield on the benchmark 10-year paper fell below five per cent levels, some PDs held on to their long dated papers thinking that the yields will go down further. This may have been a wrong call", according to debt market analysts.

Since then, interest rates globally have shown signs of inching up and domestically have at least bottomed out. " While there is no immediate threat of interest rates moving up locally with plenty of liquidity in the system, rates are unlikely to go down any further. We won't see the kind of huge profits PDs made in the past couple of years in a declining interest rate regime in the coming year", said an analyst.

Those PDs who have been trying to lighten the load by cutting their losses have found it extremely difficult, as there has been virtually no buying interest in the market for these long-term securities, since the beginning of this calendar year.

"We often find PDs or other market participants burn their fingers holding on to long-dated papers for too long. The reason for this is that all of us during the last three years have been aggressive in buying long-dated papers because that is where the opportunity to make sizable profits lies. If other securities give an appreciation of 50 paise, the long-dated ones give an appreciation of Rs 2", said a senior official with a leading public sector primary dealership.

So with the boom time of low interest rates over, where will the opportunities emerge for PDs in the forthcoming financial year? The word is that a number of them are looking to beef up volumes in the corporate debt market and focus on their portfolio management businesses.

"Whatever intra-day volatility there in the market, will be enough to present trading opportunities. We may even see the RBI allowing short selling of securities etc., this year, because the situation seems grim for the fixed income market. And with the Real Time Gross Settlement System expected to kick off shortly, PDs might still be able to ride over the rough tide with prudent management of their resources", said an analyst.