The Hindu Business Line : Buying interest in long-term papers

Analysts say that there have been substantial shifts in the holdings of most traders from short tenor papers to securities with long-term maturities.

Mumbai , Dec. 8

THE rally in bond markets over the past couple of days has lifted sentiment and softened yields aided by a fresh surge of FII buying interest and the recent cancellations of the auctions of two dated securities for Rs 5,000 crore and Rs 8,000 crore, scheduled between November 16-24 and December 1-8.

While the jury is out on how long the renewed enthusiasm in the debt market will last, some interesting trends are emerging with bond dealers taking active market positions after a long time.

In fact, analysts say that there have been substantial shifts in the holdings of most traders from shorter tenor papers to securities with long-term maturities.

A bulk of the holdings are moving towards the benchmark 7.38 per cent 2015 paper from the 7.55 per cent 2010 paper which has been actively traded so far. In the past week alone, market players have understood to have bought the 7.38 per cent 2015 to the extent of nearly Rs 3,000 crore.

"Large insurance companies and provident funds are buying this paper, so it makes more sense for traders to hold this security at this juncture, to be able to resell them at a profit to large investors," said a dealer at a primary dealership firm.

The spread between the two papers — 7.38 per cent 2015 and 7.55 per cent 2010 paper— had widened to about 40 basis points in the recent past, from about 15-20 basis points in the beginning of November, said dealers.

Ideally, the spread between these two papers should be 30 basis points and absence of this leads to technical adjustments, they added. The yield on the 7.38 per cent 2015 paper was at 6.75 per cent on Tuesday, while the yield on the 7.55 per cent 2010 paper was at 6.47 per cent.

"With the auction of Rs 6,000 crore worth of the 7.55 per cent security in November, outstanding amount in the paper had increased, there was room for appreciation in the paper as the spread between the 7.55 per cent paper and the 7.38 per cent paper was at lucrative low levels. Hence, the 7.55 per cent paper was bought heavily and consequently became overbought. This resulted in the spreads between the two papers widening to over 40 basis points," said Mr Vivek Ahuja, Head, Fixed Income Research, Tower Cap Securities.

This situation warranted unwinding on 7.55 per cent paper and move to 7.38 per cent, which was one of the reasons for the shift, he added.

"After cancellation of the two dated securities auctions by RBI recently there was lesser supply in the 10-year paper which also led to buying interest shifting in the 7.38 per cent paper," said a dealer at a private sector bank.

The benchmark 7.38 per cent paper is also more attractive as the next auction in January, will include papers of 5-9 year tenor and 20 year and higher tenor, but not a ten-year paper, he added.