The Hindu Business Line : Bonds continue to slide

Traders remained on the edge as the stand off between the US and Iran took a turn for the worse and pushed international oil prices up. Oil prices for the light sweet crude oil, favoured by Western refiners, are close to a record $76 a barrel. This technically meant that the basket price for Indian imports was now close to the threshold of $70 a barrel.

At these high prices, domestic refiners' foreign currency purchases increased as some of them reworked their lines of credit with the banks. In fact, some of the oil refiners, bankers said, were placing their oil bonds through ready forwards for meeting their liquidity requirements.

Ample liquidity

But the Reserve Bank of India, however, maintained, liquidity was not an issue. In fact, the Deputy Governor, Dr Rakesh Mohan, had said that there was ample liquidity in the system. In fact at the weekend liquidity adjustment facility auctions, the Deputy Governor stood vindicated. There were more banks at the three-day reverse repurchase window. The RBI removed Rs 58,275 crore of liquidity at the two LAF auctions during the day.

However, at the Treasury-bill auctions last week, the situation was somewhat different. The cut-off yield on the 91-day T-bill was 6.40 per cent, just 35 basis points away from the repo rate of 6.75 per cent and up 4 basis points from the previous week. The 364-day T-Bill yield, however, was 30 basis over the repo rate at 7.05 per cent.

Besides, the 10-year yield to maturity (YTM) was 8.24 per cent on a weighted average basis last week, up from the previous week's 8.18 per cent.

Despite the high liquidity, there was little impact on trading volumes. In fact one of the first signs of high liquidity was increase in trade volumes. But daily trade volumes remained under Rs 500 crore during the week. Moreover, the bid — offer spreads also remained on the high side — at anywhere between 15 and 25 basis points, the latter being mostly for long tenures, upwards of 10 years. Besides, yield spread also remained wide. The spread between one year and 29 years was 180 basis points.

Focus on equity

In fact, during the week, insurers also remained out of the bond markets, traders said. Insurers remained focussed on the equity markets. This focus was evident from hardening yields and firm equity markets during most of last week. Insurers abstention ensured that yields moved even at the long end. The 10.45 per cent 2018 was put on sale by some of the banks at 7.49 per cent and the 10.25 2021 at 7.50 per cent. Bankers said the sale of these securities was done by some of public sector banks as part of their portfolio re-balancing.

Further slide

However, expectations are the yields could slide further during the next week as well, as the Bank of Japan hikes its key rate to 0.25 per cent departing from the zero interest rate policy. Traders said that some of the Japanese FIIs are likely to move out of the equity markets. Yet foreign currency markets remained stable, as was evident from the forward premia. Forward premia up to 12 months remained under 1.2 per cent. This was partly on account of large current account and non-debt capital account inflows expected.

But exits by East Asian FIIs are likely to prompt a further rise in yields next week, traders said. The rise in yields is likely on account of the large Government borrowings planned. The Government plans to raise Rs 7,000 crore through re-issue of 7.59 per cent 2016 and 7.50 per cent 2034 securities. In addition, another Rs 1,683 crore of 10-year State Development Loans are also planned. Pricing of these securities, bankers said, would provide a signal to rates in the coming weeks.

But Government borrowings are estimated to face a slight slippage on account of the failure of divestment efforts for this fiscal. So far, the Government has raised Rs 52,000 crore through issue of dated securities as against the market borrowing target of Rs 1.14-lakh crore for this fiscal year.

Life insurers, they said, are most likely to begin their Government securities investments, only after next week when yields were expected to become attractive. The bearish outlook was also evident from the high real yields. The difference between the one-year nominal yield and the inflation at 4.84 per cent was 2.2 per cent, up from the previous week's 1.5 per cent. Besides, bankers said that credit off-take was also beginning to rise ahead of the beginning of the peak season. Incremental CD ratios are now again over 100 per cent, for the first time in three weeks. Bankers said that if this trend continued they would have to expedite their resource mobilisation efforts.

In fact, some of the banks are already preparing for one more round of deposit rate hikes after the last round in May this year. The hikes are especially since banks have been facing disintermediation of deposit resources to other financial intermediaries especially unit-linked insurance funds, where the returns are higher than bank deposits. It was to stem this exit, the bankers want to hike deposit rates and mobilise resources for an expansion in credit estimated for the current year at over 20 per cent.