The Hindu Business Line : Bonds remain weak as oil cos resort to hedging

Traders said that oil companies/corporates hedged their payment dues. Oil companies have resorted to hedging as oil prices came under pressure with rates flaring up to $63 a barrel. But many of the oil companies had hedged their receivables when the dollar breached the Rs 41-mark. Even at the current levels they are continuing to hedge, the traders said.

The traders said several corporates, taking advantage of the prepayment window under the automatic route, and ECB borrowers have also resorted to similar hedging of liabilities. As a result, forward premia remained firm between 4 and 5 per cent for tenures from one and 12 months.

However, the traders said that inward flows by way of non-resident and external commercial borrowing flows continued and were able to satiate the current demand without any major tightening of liquidity.

The short-term liquidity in the market was evident from the week end liquidity adjustment facility auction, when the bids for the reverse repo amounted to about Rs 25,000 crore, whereas only Rs 3,000 crore was accepted by the RBI.

Besides, most banks were in conformity with the new cash reserve ratio of 6.5 per cent. This pushed down the down the week's call rates to as low 3.5 per cent.

Yet , there were few signals of any softening of interest rates. At the weekend auction of the 7.49 per cent 2017 and the 8.33 per cent 2036, the RBI mopped up Rs 10,000 crore. The 7.49 per cent 2017 per cent was placed at 8.31 per cent and the 8.33 per cent security at 8.64 per cent.

The latter security was entirely mopped up by the Life Insurance Corporation, traders said.

LIC has a large appetite for long dated securities in view of the long-term liabilities. In both the categories of securities, the bids made were Rs 9,600 crore and Rs 10,500 crore respectively. The weighted yields were at least 10 basis points more than the cut-off yields in both these securities. This implied that the yield expectations of the banks were higher than those of the insurance companies/ primary dealers, who had picked up the securities, indicating low interest in long-term securities.

However, during the weekly Treasury bill auctions, the situation was exactly the opposite. The cut-off yield for the 91-day T-bill was 7.60 per cent last week, down 9 basis points from the previous week. The weighted yields, though, firmed to 7.48 per cent, up from the previous week's 7.44 per cent. Competitive bids for a notified amount of Rs 2,000 crore were Rs 4,794 crore.

There were no non-competitive bids.Clearly, there are indications that corporate interest in Treasury bills has waned. For the 364-day T-bill, the yield was fixed at 7.77 per cent and weighted yield at 7.73 per cent. Almost the entire amount in both categories of securities was from the banking sector, traders said.

The preference for the short end was evident from the trend in the 10-year yield to maturity (YTM).

This hardened to 8.24 per cent on a weighted average basis last week, up from the previous week's 8.21 per cent.

The undertone remained weak as was evident from the low daily trade volume. Daily trade volumes were just around Rs 600 crore.

Inter yield spreads

The narrow inter yield spreads indicated low interest in bonds. The spread between one year and 29 years was just 60 basis points.

However, the one-year real yield rose to 2.25 per cent. Traders said that this was largely on account of the selling pressure, leading to a hardening of yields as banks derisked their portfolios and shrank the average maturities of their investment portfolios. Besides, bankers said that some of them were also faced with redemptions of bulk deposits.

The redemption was evident from the negative growth in time deposits. Time deposits shrank by Rs 4,242 crore in the fortnight, driven by the redemptions of bulk deposits.

Besides, credit growth was also negative. Credit growth dropped by Rs 16,571 crore, as banks pursued the RBI's diktat of portfolio rebalancing and tightened credit to the retail sectors.

But this was likely to trigger a short rally in debt, bankers said, as some of them move over to investments, mostly of securities with short tenures. This was, however, likely to push down the yield on assets.

The average yield on assets is currently about 9 per cent plus and as the shift to investments take place a drop in assets yields would follow they added, that could shrink the net interest margins in the coming quarter from the current average of over 3.1 per cent.