The Hindu Business Line : Bond volumes up 77% as banks churned portfolios

Mumbai, Jan. 1 The government securities market ended calendar year 2008 with a huge surge in volumes as banks actively churned their trading portfolios to take advantage of the falling yields.

Daily average volume in the G-Sec market in the January-December 2008 period surged by a whopping 77 per cent to around Rs 7,800 crore as against Rs 4,400 crore in the corresponding period last year.

The yield on the benchmark 10-year Government Security (8.24 per cent 2018 GS) dropped by 254 basis points to end the year at 5.25 per cent.

In other words, the price of this security shot up Rs 17.78 over a one-year period.

Yields and prices of G-Sec are inversely related. If one takes into account the churning of the portfolio that these savvy market players routinely carry out, the returns could have been higher - anywhere between 25-30 per cent.

The yield on the 10-year G-Sec is seen testing the 5 per cent level in the run-up to the Reserve bank of India’s third quarterly review of its monetary policy on January 27.

“In the backdrop of the adverse economic situation obtaining in 2008, banks turned cautious on the lending front on account of fears of adding to their non-performing loan portfolio.

Protection of capital became imperative. So, they started putting money in Government Securities, resulting in the yields sliding drastically,” said Dr Golaka C Nath, Senior Vice-President, CCIL.

According to Mr B. Prasanna, Managing Director and CEO, ICICI Securities Primary Dealership Limited, when interest rates fall, the activity in the bond market increases and trading volumes go up.

He explained, “Typically, in a falling interest rate scenario when there is not much room for hedging or trading, banks buy and put the bonds in their Held-to-Maturity portfolio. The bonds are issued once, invested in and forgotten."

" But in the current scenario, when yields are falling and bond prices are rising, banks will buy and sell bonds and churn their portfolios to make profits. Banks buy and sell the same securities within a span of say, one or two weeks, as they can make profits.”

“Trading volumes have risen significantly in the G-Sec market on the back of volatility in yields. We expect buoyancy in the market to continue for another six months. With inflation thawing, the RBI is expected to cut signal rates further,” said Mr S. Srinivasa Raghavan, Head-Treasury, IDBI Gilts, said.

Market players expect the buoyancy in the G-Sec market to spill over into 2009 on the back of soft interest rates and stimulus packages that the Government may announce.

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