The Hindu Business Line : Yields slide; bonds get support from banks, insurance cos

Bangalore, Feb. 10 Bond yields resumed their southward momentum propelled by an asset chasing frenzy among banks and retreating international oil prices.

Traders said that bonds were supported by large purchases by banks and insurance companies. The banks’ move into investments was fuelled by large accretion of deposits including from NRIs. Some of these funds were temporarily parked for investing in some of the mega initial public offerings .

Besides, some East Asian funds have begun shifting to India, after divesting from their US debts.

The divestments from US treasuries are largely on account of low yields. Investments in Indian securities generated far higher returns. In fact, bankers said that some of the funds are developing an appetite for Indian debt paper.

Accordingly, some FIIs took advantage of their $3.2-billion limit in government securities investments.

Nominal yield on one-year US Treasury security is currently about 2.10 per cent. Corresponding one-year yield in India is about 7.37 per cent.

In fact, most funds that exited Indian equities moved into government securities, in anticipation of a rupee appreciation. During the last week, FII inflows were equivalent to $1.59 billion.

However, last week, despite the large flows, the rupee-dollar exchange rates retreated. The reason stemmed from bunched payment dues of public sector oil companies. In addition, there were also large debt service outflows on corporate external commercial borrowings, traders said. The dollar, as a result, firmed to Rs 39.55 towards the week-end.

At a premium

Forward premia, despite this trend, went into a premium up to three months. The premium implied that forward dollars were cheaper than spot. Traditionally, forward rupee has remained at a discount or more expensive than spot against the dollar. The switch to a premium was largely on account of forward cover by exporters.

As a result, forward premia for one month and three months were at a premium of 2.43 per cent (1.52 per cent discount) and 1.01 per cent (2.34 per cent discount) respectively.

The discounts for six months and 12 months crashed to 0.66 per cent (2.08 per cent) and 1.01 per cent (1.78 per cent).

The RBI’s interventions in the foreign exchange markets were restrained in view of large purchases by oil companies.

LAF auctions

Still, at the week-end liquidity adjustment facility auctions, it was the reverse repurchase window that was favoured due to the liquidity overhang. The recourse to the reverse repo window was Rs 15,470 crore. This was despite the market stabilisation scheme (MSS) auctions during the week. During the week, Rs 13,000 crore was mopped up through issue of dated securities. The securities issued included the 8.20 per cent 2022, the 8.33 per cent 2036 and the 12.25 per cent 2010.

The placements were made at cut-off YTMs (yield to maturity) of 7.62 per cent, 7.77 per cent and 7.52 per cent respectively. Bids at these auctions were more than 200 per cent the notified amount. The high bids were despite the large mop-up through Treasury Bills.

At the 91-day T-Bill auction, the cut-off yield was 7.27 per cent, unchanged from the previous week. The weighted average yield was 7.19 per cent, down from 7.23 per cent. At the auctions, the bids accepted amounted to Rs 4,300 crore as against a notified amount of

Rs 2,000 crore. At the 182 T-bill auctions, the cut-off yields were also 7.27 per cent or on par with the 91-day T-bills. But the weighted average 182-day T-bill yield of 7.23 per cent was lower than the cut-off yield of the 91-day T-bill yield, a pointer to the direction of short-term rates in the coming weeks.

The ten-year YTM reflected the softening trend. The weighted average ten-year YTM ended the weekend at 7.46 per cent, down from the previous week’s 7.52 per cent.

Trade volumes remained high. The average daily trade volume was Rs 7,300 crore. But banks are beginning to shift to the longer end of the yield spectrum.

This is evident from high trade in dated government securities. Dated securities’ share are about 96 per cent of the overall trade volume. Till about three weeks ago, T-bills and short dated securities comprised about 40 per cent of the overall trade volume.

Outlook bullish

Traders said that the outlook remained bullish. This is evident from the thin bid offer spreads.

Bid offer spreads are now only about 5 basis points. Thin spreads implied high interest on investments. In fact, many banks picked up cues and started reversing their de-risking processes. This implied that more banks are prepared to go to longer maturity securities. Typically, such a move takes place when rates are expected to soften.

Expectations of softening are despite the advancing inflation. Inflation currently is 4.11 per cent which translates into a one-year real yield of 3.26 per cent. The retreat notwithstanding real yields are still well over the internationally accepted level of 1.5 per cent.

Yet traders said that major revisions in policy rates are unlikely this fiscal year. This is despite the arbitrage opportunities. Instead, large inward flows are likely to provoke stronger interventions from the RBI.

The RBI already has considerable leeway for more MSS operations, since the threshold for revision is Rs 2.35 lakh crore. The outstanding as on February 1 this year is Rs 1.71 lakh crore.

Besides, money supply growth at 23 per cent remains way above target.

This implies that there is unlikely to be any major stimulus for credit growth from the banking regulator. Investment interests consequently are largely triggered by the low credit off-take and influx of deposits into the banking system.

Credit growth

But credit off-take is beginning to pick up. This is evident from the credit-deposit ratios so far this year. CD ratio for the first 10 months was 50 per cent, up from 44 per cent during the first nine months. Credit growth remained at 22 per cent.

Investments grew at 30 per cent in the first 10 months of the year. The investment-deposit ratio is 37 per cent, way above the statutory requirement of 25 per cent.

But this ratio is likely to rise as some demand deposits are redeemed due to failed IPOs, prompting more deposit rate cuts in the coming weeks.