The Hindu Business Line : Rising oil prices bring bond rally to a halt

Bangalore, Jan. 11 Bonds halted their rally as traders booked profits amid hardening global oil prices. Traders also said that banks were preparing for a big credit push, as part of the monetary stimulus. Currently, most of the banks preferred parking funds in the Reserve Bank of India’s reverse repurchase window, to remain liquid ahead of the credit offtake.

Credit offtake during the last three weeks had tapered off, as some corporates anticipate lending rates to fall further in the coming weeks. Traders said the corporates preferred to wait till the new cash reserve ratio regime comes into effect on January 17. Bankers said credit offtake remained low, with incremental credit-deposit ratios dropping to less than one per cent in the last fortnight. The only drawdown was from oil companies, with global oil prices hardening to $48.71 during the week. Besides, demand also came from corporates for repayments on cross border debt servicing obligations. This led to the rupee depreciating slightly over the last week-end.

ECBs seen resuming

However, exporters took forward cover, anticipating large External Commercial Borrowings to resume over the next few weeks, since the RBI interest rate ceilings have been waived temporarily. The trend was evident from the movement of the Non-Deliverable forward, where the rupee-dollar exchange rate was lower than the domestic market rates, by at least 30 paise for one month, for the first time this financial year.

As a result, forward premia shrank. One, three, six and 12-month premia ended the week at 3.65 per cent (4.51 per cent), 2.90 per cent (3.29 per cent), 2.22 per cent (2.41 per cent) and 1.73 per cent (1.83 per cent) respectively. Three-day forward premium also softened to 4.15 per cent, down from 5.08 per cent, in line with the drop in the repo rates with arbitrage opportunities shrinking.

Besides, bankers said, the RBI was closely monitoring the reverse repo and was seriously considering reimposing the ceiling on the reverse repo window. The ceiling of Rs 3,000 crore per day was discontinued in July 2007. But with credit offtake low, banks had few alternatives other than parking short term funds in reverse repos.

At the weekend liquidity adjustment facility (LAF) auction, recourse to the reverse repo window was Rs 27,440 crore or a third of the previous weekend’s figure. Banks also increasingly preferred shorter maturity instruments for parking the surplus funds.

Appetite waning

At the weekly T-bill auctions, the cut off-yield on the 91-day T-bill was 4.71 per cent, though the weighted average was 4.58 per cent. At the auctions, the mop-up amount was Rs 8,000 crore. The bid-to-cover ratio was 2.89 times. However, at the government borrowing auctions the response was far less encouraging. The rush for government securities appeared to have vanished.

At the last auctions for Rs 15,000 crore, both the 6.30 per cent 2023 and the 7.5 per cent 2034 devolved in view of the low prices quoted. Only the 7.59 per cent 2016 made at a Yield to Maturity of 6.7 per cent. The longer maturity bonds — the 6.3 per cent 2023 and the 7.5 per cent 2034 — were placed at 7.19 per cent and 7.60 per cent respectively. But the bid-to-cover ratios was very low.

The bid-to-cover ratio on the 7.59 per cent 2016 was just about 1.75, implying low interest for long dated securities. The changed sentiment resulted in the ten-year YTM hardening by over 100 basis points to 6.27 per cent, up from the previous weekend’s level of 5.17 per cent. But bond yields’ ascent also stemmed from the increased government borrowings limits, after the supplementary grants were approved by Parliament.

Addl borrowings

As a result, gross government borrowings are now likely to be closer to about Rs 1.85 lakh crore. This additional borrowing implied that market stabilisation bonds that mature were likely to be rolled over into fresh government borrowings, instead of liquidity being released into the banking system. Moreover the signals for higher yields also came from the RBI through an increase in the notified amounts of the 91-day T-bill auctions.

However, trade volumes remained high on account of large purchases by some of the mutual funds. Average daily trade volume was about Rs 17,000 crore or slightly above the NSE trade volume of Rs 13,000 crore.

The current hardening of the bond yields was likely to impact the State government loan auctions this week, bankers said. This was because in the next week too, the T-bill auction amount was fixed at Rs 8,000 crore.

Yields seen falling

Bankers, however, said government security yields were likely to resume their softening trend. According to HDFC Bank’s Chief Economist, Dr Abheek Barua, “It is likely that key bond yields, such as the benchmark 10 year bond yield, will decline some more in the near term and perhaps even pierce the 5 per cent-level.”

The outlook stemmed from weakening inflation and banks remaining choosy about credit.

Satyam exposures

Banks begin re-evaluating corporate lending risks, especially in the light of Satyam Computers debacle. There are no direct exposures in Satyam. However, bankers admitted that there were indirect exposures in the form of retail loans that could lead to some provisioning. Such corporate lending risk revaluation favoured public sector bonds. Spread between sovereign and triple ‘A’-rated, corporate rated bonds shrank as a result. Rural Electrification Corporation raised 10-year funds at just 8.65 per cent last week, whereas private corporate papers were priced at a spread of 150 basis points more.