The Hindu Business Line : PDs, foreign banks shift to short-tenor papers

Primary Dealers (PDs), along with foreign banks, have been moving from the long tenor securities to the short tenor securities. Short-dated papers tend to fall lesser than longer dated paper in a rising interest rate scenario. Yields on government paper have been moving up. The yield on the 10-year benchmark paper rose about 40 basis points over the past week and is currently at 5.77/78 per cent.

The past week had seen the long dated securities sliding, and the foreign banks started selling from June 18, and the PDs entered into selling mode since Monday, said a primary dealer. So far, the PDs have sold about Rs 1,000 crore worth of long dated securities, he said. Some of the long dated securities being liquidated are 7.38 per cent 2015, 6.13 per cent 2028, 8.07 per cent 2017, 6.17 per cent, 6.01 per cent, 8.35 per cent, 7.95 per cent 6.13 CG 2028 per cent. These securities are being sold to Life Insurance Corporation (LIC), Central Board of Trustees of the Employees Provident Fund (CBOT) and others. Market players say that this is the best time for the insurance companies and Provident Funds to enter the long dated securities, who are understood to have been buying these long tenor papers over the week.

Exiting longer dated papers may not be easy. For one, the RBI has been issuing longer tenor papers for the past year. It is not easy to offload these papers, and hence some are still holding on to these, say dealers.

Mr Nitin Jain, Head, Fixed Income, ICICI Securities, says: "Primary Dealers balance sheet is volatile as they are also expected to perform the market making functions. In the present scenario, their positioning will be on short end and lower duration securities unless compulsions are dictated by the Government of India."

He added: "Not much buying has been there in the last three-four days, with T-Bills being the favourite instruments to park funds." The sharply falling prices in the last week have inspired dealers to sit light, with some of them also moving into parking funds in the call money, repo (LAF of the RBI) or the Treasury bills of the Government. A dealer said: "Although bond prices have fallen in a rising interest rate scenario, it is too early to predict a trend. This scenario is a part of the business cycle. The market had recovered from a fall in prices in 2003. At present, the profits of the PDs might not be very high but banks and institutions are more likely to suffer as they hold securities to maturity and do not actively trade in them."