The Hindu Business Line : Life insurers, MFs help bonds rally

But, traders said that what also rendered support to the bond markets was the Reserve Bank of India's notification enlarging the list of entities permitted to do ready forward transactions.

Bankers said that the notification allowed some of the large corporates directly into the government securities markets, since ready forwards made their investments more liquid.

Corporates hitherto parked funds in short-term time deposits.

SLR obligations: For bankers, the shift helped in reducing their SLR obligations on volatile bulk deposits. Currently, banks are expected to maintain a 25 per cent SLR of the net demand and time liabilities.

Corporates' shift to government securities resulted in a deceleration of short-term time deposits and in turn a reduction in the reverse repo mop-ups by the RBI. After the notification, the average mop-up through the reverse repos steadily dropped.

At the weekend reverse repo auction, the mop-up was just Rs 14,285 crore. Two weeks ago, it was over Rs 20,000 crore . Despite fall in the mop-up, the 91-day T-bill yields softened. The 91-day T-bill auction yields dropped to 5.16 per cent, down from previous week's 5.20 per cent.

However, the 182-day T- bill auction yields hardened to 5.37 per cent, from 5.32 per cent.

Reprieve from bear hug: This trend reflected in 10-year yield to maturity (YTM) as well, where yields dropped to 7.15 per cent on a weighted average basis, down from 7.21 per cent, indicating a temporary reprieve for traders from the bear hug.

Softening of yields was also driven partly by the large coupon flows on securities. Last week, coupon flows were in the region of about Rs 1,000 crore. In addition, there were also funds from the redemption of maturing T-bills.

All these funds found their way back into T-bills, since yields were higher. The maturing T-bills were redeemed at yields below 5 per cent, whereas the reinvestments were done at yields of 5.15 per cent.

Bankers said that all the redeemed T-bills, both the 91-day and the 364-day, were moved mostly into 91-day securities and highly liquid securities, in particular the 7.38 per cent. This was evident from the high spread between the 91-day and 182-day, which was about 21 basis points.

Life insurers' choice: Bankers also said that most purchases by life insurers were in high-coupon securities, though some funds preferred liquid securities such as the 7.38 per cent 2015. Purchases by funds resulted in a narrowing of spreads between the weighted average yield and the yield on the 10-year benchmark.

But the current rally in bonds was unlikely to be sustained, bankers said. This was despite the rise in trading volumes.

Trading volumes: Daily average trading volumes were in the region of Rs 4,000 crore towards the weekend. The reason for the doubts in the sustainability of the rally was the wide spreads between one and 23 years, which was over 200 basis points.

Bankers said that the reason for this trend was that life insurers' purchases were mostly at the middle end, where as funds were mostly at the short end. At the long end, particularly for tenors over 15 years, there was little interest.

In fact, in long tenor securities such as the 6.01 per cent 2028, yields actually widened, implying very little interest.

Moreover, inflation weakened to 5.61 per cent and real yield for one year as a result was in the positive zone by only 10 basis points. Real yields at this level were far away from international levels. Internationally, nominal yields for one year are at least 1-1.5 per cent above inflation levels.

Foreign funds' exit: Besides, many foreign hedge funds were continuing to exit from domestic markets. In fact, most of them were encashing their Participatory Notes (an instrument floated by foreign institutional investors/ brokerages to facilitate unregistered investors to participate in the domestic equity market).

The exit of these funds partly resulted in the reduction of forex exchange reserves by $1.3 billion.

Hedge funds have increasingly begun moving back into the dollar funds in view of the rising yields.

However, despite the hedge fund exit, there was little impact on the foreign exchange markets, either by the way of rising forward premia. In fact, forward premia remained steady.

Little impact: This was partly because oil companies are largest entities to tap the markets for foreign currency. Their presence impacts forward premia and consequently bond yields. Since few were in the market last week there was little impact on either premia or yields.

Some bankers anticipate the premia to remain soft, as some export receipts were likely to mature and inflows expected.

Credit offtake: Besides, bankers said that last week's soft yields were also lead by the slowdown in credit offtake. Non-food credit offtake for the last reporting fortnight dipped by Rs 9,740 crore.

But, food credit offtake was picking up.

Moreover, bankers said that the dip was more technical in nature and offtake was expected to resume in the coming weeks, leading to a reversal from the softening yields.

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