The Hindu Business Line : Bond yields stable in thin trading

Traders said that what also helped bonds was the Federal Reserve Board's decision to keep Fed funds rate (the rate applicable for overnight borrowing/lending by US Banking institutions) at the current level of 5.25 per cent for the third straight week.

This is now likely to sustain the momentum of capital flows into the country. The stability was evident from the weekly Treasury Bill auctions.

At the auctions the cut-off and the weighted average yield on the 91-day T-Bill remained unchanged at 6.65 per cent.

Reduction in bids

The 364-day bids also remained at 6.99 per cent. In both these auctions, the actual bids were far higher than the notified amounts. Yet the accepted bids were only Rs 651 crore for the 91-day bill and the Rs 1,285 crore for the 364 day T-bill as against the notified amount of Rs 2,000 crore each inclusive of the Market Stabilisation Scheme of Rs 1,500 crore and Rs 1,000 crore, respectively.

This reduction in bids accepted has triggered speculation that the market stabilisation scheme of the RBI is likely to be curtailed to increase the liquidity in the markets that has seen some tightness.

Traders said that this reduced mop-up through the T-bill is a signal for a preference for stability.

Reflecting the stability, the ten-year yield to maturity slipped to 7.65 per cent on a weighted average basis from the previous weekend's level of 7.71 per cent.

Moreover, after the Union Finance Minister's comments in Stanford, US, where he had said that inflation had been contained, expectations in the domestic markets are that the current reverse repo/ repo band would be maintained between 6 and 7 per cent.

Low volumes

The volumes remained low at barely Rs 500 crore per day. But the low volumes were driven by series of holidays and the bank staff strike on last day of the week. The outlook remained steady to buoyant.

This was evident from the thin yield spreads. Spreads between one and thirty years were about 115 basis points. Besides, the bid-offer spreads also remained low at barely five basis points.

Traders said that the thinning spreads were on account of the large number of buyers, in particular insurance companies.

Insurers are large buyers due to the big rise in premiums. For the first six months of the current year, premiums have increased by over 160 per cent.

In fact, life insurance share in gross domestic savings (GDS) has been on the rise and bank deposits on the decrease. Insurance currently accounts about 15 per cent of the GDS and is poised to rise even further.

Bulk deposits

This growth has also become a source of bulk deposits for the banks. A large component of the bulk deposits with the banks currently comes from mutual funds and insurance companies. This is even in preference to deployment in the equity markets.

This accretion in bulk deposits is prompting banks to remain at the short end of the yield curve, between one and five years.

Bankers said there is unlikely to be any pressure on yields given the fact that they already have a G-Sec investment deposit ratio of over 32 per cent, as against the SLR of 25 per cent.

In fact, this high ratio has given them sufficient flexibility to push up credit growth.

Incremental CD ratios are already at over 100 per cent. Credit growth rate is likely to maintain the current momentum of 30 per cent growth on a year- on-year basis.

Deposit accretions would have to accelerate to sustain this growth.

Consequently, bankers said some tinkering in the deposit rates, particularly at the middle ends were likely, after the announcement of the credit policy.

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Bond yields stable in thin trading