The Hindu Business Line : High oil prices, MSS resumption lead to hardening of yields

Bankers said that Government's stepped-up borrowing frequencies also lent momentum to the hardening of yields. Last week, the Government raised Rs 10,000 crore through 10-year and 28-year issues, both of which were fully subscribed. The 10-year issue was placed at 7.55 per cent and 8.14 per cent respectively. Traders had expected a much lower cut-off pricing evident from the weighted average yield of 7.52 per cent and 8.09 per cent respectively.

High cut-off yields

Traders said the high cut-off yields clearly sent out the signal that the RBI was unwilling to accept any softening of yields in the coming weeks. This signal was also reinforced through its intervention through the MSS, mopping up at least another Rs 2,000 crore.

This was in addition to the normal Treasury bill auction that takes out about Rs 1,500 to Rs 2,000 crore. Last week, with the resumption of the MSS, the cut-off yields on the 91-day Treasury bill was fixed at 5.73 per cent up, 32 basis points over the previous week.

The weighted average yield hardened by 29 basis points to 5.65 per cent. Similarly, the 182 T-Bill also hardened. The cut-off and weighted average yields were 5.95 per cent and 5.90 per cent respectively.

Clearly, whatever MSS securities were unwound were rolled over as fresh mop-up, traders said. The MSS and dated securities auction impacted the three-year liquidity adjustment facility auction.

The mop-up at the auction was Rs 49,545 crore last week. It also had an impact on the 10-year yields. The 10- year weighted average Yield to Maturity (YTM) was 7.55 per cent last week up 12 basis points over the previous week, as traders took the signal from the RBI.

Undertone weak

The undertone remained weak, evident from the high yield spreads between one and 29 years that remained close to 200 basis points, up from the previous week's 188 basis points. Moreover, interest in securities also remained low. This reflected in the high bid- offer spreads.

The spreads at the long end were as high as 15 basis points, clearly indicating the low interest in trading. As a result, daily trade volumes were low at barely Rs 1,00 crore.

Bankers said that what caused the low trading interest was the low realisable yields in investments that were less than the weighted average cost of working funds. Unless the spreads were attractive investments in G-Secs would elicit little interest.

In fact for most banks investments are confined to compliance to statutory reserve ratios.

Since the existing portfolio of securities themselves were highly liquid, bankers said it made little sense to have investments in Government securities, especially when credit offered better yields, that could generate better spreads.

After the hike in rates, credit offers a yield of about 9 per cent as against 6.5 per cent on G-Secs.

Forex accretions

Bankers said that even insurers stayed away from securities purchase as most of them anticipated yields to harden further in the coming weeks.

Incipient signs of hardening yields were already apparent from the high real yields. One year real yields are currently at 2.77 per cent.

However, foreign currency inflows continued unabated. Net foreign exchange accretions were about $3.41 billion. Current account receipts were fully absorbed by the oil companies for their meeting their import payments.

Forward premia as a result remained in 1.25 per cent region.

But traders said that there were possibilities of rise in forward premia was likely as some uncovered exposures were likely to surface. This was particularly for meeting servicing dues of external commercial borrowings by corporates.

Oil companies have been large borrowers for meeting their payment obligations in view of the high basket price estimated at $68 a barrel or about $495 a tonne.

This was one of the factors that were also keeping the nominal and incremental credit deposit ratios high at over 70 and 100 per cent respectively, despite the measured increase in lending rates since the beginning of last fiscal year.

In fact, bankers said that credit demand from oil companies was likely to increase as the government delays a price hike in the domestic market.

This could result in banks reaching their exposure limit to the oil companies.