The Hindu Business Line : Life insurers, MFs keep bond market buoyant

Bankers said that accretion of funds with some of the mutual funds also helped propel bonds. What helped the yields to soften was the rush by some banks to park resources in liquid bonds due to non-allotment at last week's auction of the 8.35 per cent 2022 security.

Bankers said that most of them had placed their bids at a yield to maturity (YTM) of close to 7.40 per cent for the 17-year paper. But the entire amount of Rs 4,000 crore was mopped up by Life Insurance Corporation at a YTM of 7.28 per cent.

Large redemptions: Besides, there were also some large redemption-driven flows with the banks of maturing securities, particularly public sector bonds and treasury bills. The redemption added to the liquidity in the markets. As a result, banks were suddenly flush with funds. This reflected in the reverse repo auctions during the week immediately after placement of the 17-year bonds.

On Wednesday, after the auction, reverse-repos raked in close to Rs 31,000 crore and at the weekend auction it was Rs 33,000 crore.

Despite the increase in liquidity, yields on the 91-day Treasury bill hardened. At last week's auction, the cut-off yield was 5.20 per cent, up from the previous week's level of 5.15 per cent.

At the 364-day T-bill auction, yields remained steady at 5.59 per cent, almost at the same level as the previous auction. Traders said that one of the reasons for this trend was that bankers' interest was focused only at the short-end.

Tapping repo window: In fact, traders said that some large banks and mutual funds were utilising repo window for arbitrage purposes. This was especially since the repo window was thrown open to funds and corporates.

Some of these funds, bankers said, were opting to park their short-term resources at the reverse repo window at five per cent.

Despite this arbitrage, the 10-year YTM eased to 7.05 per cent on a weighted average basis, down from the previous week's level of 7.15 per cent.

Another reason for this trend, bankers said, was the accretion to the unit-linked funds with the life insurance companies. Traders said that most of the accretions were with the balanced funds, since policyholders preferred to get the best of both worlds.

Since insurers typically have an appetite for long-term funds, traders said this preference helped drive down yields at the long ends.

Pvt insurers' choice: Market savvy private sector life insurers preferred to look for bargains in high-coupon securities. Faced with bankers selling of some of their high-coupon portfolios up from 10 years onwards, insurers were able to mop up large amounts of high-coupon securities, such as the 11.50 per cent 2015 and the 10.79 per cent 2015.

Last week, the 10.47 per cent was sold at a YTM of 7.29 per cent; the volume on this particular security on Friday crossed Rs 10 crore.

Despite the rally, trading volumes were subdued. Daily trading volumes hardly exceeded Rs 3,000 crore.

Bearish outlook: Indications were that the rally was unlikely to sustain for long, traders said. That the outlook for the markets remained somewhat bearish was also evident from the wide spreads between one year and 23 years. Last week, the spread was 189 basis points.

Traders said that what also led to doubts about the sustainability of the rally was the inflation number. Last week, inflation, as measured by the wholesale price index, was down to 5.55 per cent.

The real yield for one year at this level, though positive, was just three basis points, way off the internationally accepted level of 150 basis points.

Oil cos stay away: Besides, traders said that oil companies stayed away from the markets. This was also part of the reason for the softening of yields.

In fact, forward premia continued to remain soft. But, oil prices have begun moving up and are once again above $51 a barrel.

This was unlikely to impact the purchase prices immediately, since oil consumption during the lean season tendto taper off.

Hedge funds were steadily pulling out of the domestic equity markets and this may put an end to the rally.

Forex reserves: Last week, foreign exchange reserves dropped by $520 million bringing the currency reserves down below $140 billion. This trend is expected to continue for some more time.

Despite the measured exit by hedge fundsencashing their Participatory Notes, forward premia were not affected. This was partly on account of the absence of importers and oil companies.

Forward premia for one month remained below 2 per cent. For six and twelve months, it was below 1.5 per cent.

Credit offtake has begun picking up, after a gap of two weeks. Last week's RBI data indicated that credit offtake of Rs 9,500 crore, led by a strong non-food credit growth.

Non-food credit growth has resumed its rise on account of the strong retail credit offtake, with the conclusion of the year-end accounting.

Rising offtake: Besides, corporate credit offtake was also expected to resume, traders said driven by large planned capital expenditure. This was particularly in the case of infrastructure spending. As a result, the credit-deposit ratios for most banks were close to 100 per cent on an incremental basis.

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