The Hindu Business Line : Bonds remain firm on softening crude rates

Traders said that both public and private sector oil companies were in the market for meeting their foreign currency requirements as oil prices went below $55 a barrel.

Twin interventions: The rush by the oil companies, traders said, prevented yields from softening.

Instead, yields remained steady despite the liquidity build-up, evident from the twin interventions of the Reserve Bank of India through the Liquidity Adjustment Facility. The combined intervention resulted in a mop-up of Rs 16,820 crore.

The large mop-up was also on account of the release of additional liquidity from the maturing securities under market stabilisation scheme, in particular the 91-day T-Bills and 182-day T-Bills issued early this year.

This reflected at the weekly T-Bill auctions last week.

The 91-day T-Bill yield remained steady at 5.74 per cent, the same level as the previous week.

The weighted yields, however, were 5.70 per cent, signifying that some bidders had actually quoted far lower yields at the auctions. Similarly, at the 182-day T-Bill auction, the cut-off yields remained steady at 5.90 per cent, though the weighted yield at 5.86 per cent reflected the same trend as the 91-day T-Bill.

Despite the increased liquidity, the 10-year yield to maturity remained almost steady at 7.11 per cent on a weighted average basis, up slightly from 7.10 per cent the previous week.

Traders said that the hardening was partly driven by the twin mop-up.

Low volumes: The improved liquidity notwithstanding, trading volumes continued to remain low.

The daily average volumes dropped to less than Rs 1,000 crore, implying that there was little trading interest.

Traders said that bankers continued to remain indifferent to government securities.

Life insurers also stayed away from the market in anticipation of a hardening of yields and also there were only few high-coupon securities up for sale.

Their absence was also particularly on account of the Rs 8,000-crore twin auctions (8.07 per cent 2017 for Rs 5,000 crore and 7.40 per cent 2035 for Rs 3,000 crore) planned during the week.

Bankers' focus: Bankers were not very keen on pitching for these securities. This was especially at a time when the focus was on credit and improving their respective return on assets.

The low interest in securities was also evident from the widening spreads.

Last week, spreads moved to 165 basis points between one year and 23 years, up from 155 basis points.

High spreads: The high spreads also implied that the outlook for the markets was bearish, especially for securities at the long-end of the yield curve - upwards of 10 years.

The bearish outlook stemmed from anticipation that some of the big foreign institutional investors were likely to begin encashing their gains from the stock markets. Such an encashment was likely to push for a further hardening of yields, bankers said.

It would be only at that time that life insurers were likely to enter the market as large buyers, they added.

Some of the institutional investors have already begun to book gains in the stock market. Expectation of this encashment also prompted oil importers and some of the corporate borrowers to push for taking forward cover in the markets, evident from the rising forward premia.

Widening forwards: The forward premia for up to three months was above one per cent.

Bankers said that the widening premia was also due to some exporters deferring their inward remittances. The deferral, bankers said, was likely to lead to a tightening of the markets in the coming weeks.

In fact, for the latest week, foreign exchange remittances declined by about $4 million to $142.177 billion, a drop of $1.6 billion over a four-week period.

Besides, inflation was on the ascent. Real yield for one year was 1.6 per cent on the basis of an inflation figure of 4.32 per cent.

Despite this real yield level, there was little scope for nominal yields to retreat, traders said.

This was on account of the high credit growth rate. The incremental credit-deposit (CD) ratios for most banks continued to be in the 100-per cent range, propelled by the non-food credit offtake.

Credit continued to grow by 32 per cent. This has now pushed the nominal CD ratio close to 70 per cent for several banks.

Investment-deposit (ID) ratios are down to 38 per cent and on incremental basis were already negative.

Yet, not many bankers were willing to hike deposit rates, the reason being even at current rates, deposit growth for short-term fund continued to swell.

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