The Hindu Business Line : Illiquid stocks turning active

ONE segment of government securities has been showing signs of buoyancy in a rising interest rates scenario. The g-secs until now considered illiquid are being traded quite actively on the debt market.

One of the main reasons for this trend is the unpredictability of the interest rate movement.

Trading in these papers has been now noticeable for a month. Volumes in these illiquid papers have touched Rs 150 crore compared to an average volume of Rs 25-50 crore.

These papers are of a fairly shorter tenor but have witnessed a northward movement in their yields to the tune of about 50 basis points. Some of these are 12 per cent 2008 paper, 12.29 per cent 2010 paper, 12.25 per cent 2010 paper, 12.32 per cent 2011 paper, and 11.30 per cent 2011 paper.

"The spreads on these papers have become attractive of late. They have risen by about 50 basis points compared to earlier 10-20 basis points spreads,'' Mr Piyush Wadhwa, Vice President, ICICI Securities Ltd, said.

Public sector banks appear to be active sellers of these securities with a certain section of investors showing an interest, market players said.

According to dealers, portfolio churning for profit booking by the public sector banks is another reason for selling in these papers.

Provident funds are reportedly buying these papers as they find the yields attractive. This in turn is benefiting banks in booking profits in these papers, debt market participants said.

Dealers also indicated that unwinding of swap positions earlier entered into had pushed the sales of these papers.

Another reason cited was the window of opportunity to get a good value on these papers is small because their tenors are much shorter.

Said a senior dealer, "As these papers are of a shorter tenor they are approaching maturity. As the maturity is nearer due to pull-to-par effect, the prices on these fall, hence to avoid valuation losses players holding these papers are offloading them."

Pull-to-par effect means that as a security approaches its maturity, its price becomes closer to its face value or par value, which translates into a reduction in price from Rs 104 say today to Rs 100 on the date of maturity. Valuation losses would occur if an opportunity of selling a security at Rs 104 were lost now, as its price will reduce as it approaches maturity.

Besides, there is a possibility of stop losses being triggered in these securities for some players as the yields have risen in the shorter segment securities, which is why they are being sold in the market.