The Hindu Business Line : Bond traders cautious as FIIs begin offloading

In addition, banks are preparing for their third quarter results. At this juncture, not many banks/institutions are keen to go overweight on Government securities.

This is particularly at a time, when foreign institutional investors, who were major liquidity drivers, begin their year-end liquidation.

This stage has already begun, evident from the week-end drop in the equity markets.

However, oil companies continued to stay away from the markets, despite soft prices. Traders said that this was partly because some companies anticipated that crude prices would drop below $40 a barrel.

While the price retreat has provided substantial succour to the domestic refining companies, anticipations are that prices would fall further in the coming weeks, as some of the futures contracts taken during the last few months are due to mature.

Traders said that only after prices drop beyond these levels would the oil companies be expected to make their entry.

MSS scheme: But the liquidity tightened after the reintroduction of the RBI's Market Stabilisation Scheme (MSS) at the 91-day T-bill auction. Last month, the RBI had discontinued it, especially since bankers took recourse to the repo window (the repurchase window where the RBI provides short term liquidity support).

The reintroduction was sparked by the sudden influx of FII generated funds, which pushed up the rupee.

Initially, FII entry had caused little impact on domestic liquidity partly because oil companies mopped up the excess dollars accumulated due to high prices. However, with the reversal in the situation and the absence of oil companies, the liquidity overhang returned.

At the 91-day T-bill auction, yields hardened to 5.41 per cent, as a result of higher mop-up.

The previous week, the yield on the 91-day bill was 5.16 per cent.

RBI's signal: The liquidity mop-up through the MSS conveyed the signal that the RBI was not prepared to allow yields to soften, traders said. As a result, the ten year yield to maturity hardened to 6.82 per cent, up from last week's 6.71 per cent.

Moreover, new securities are becoming the benchmarks for the ten-year yield to maturity. These include the 11.43 per cent 2015 and the 10.47 per cent 2015, along with the 7.38 per cent 2015.

Traders said that the preferred benchmark would be the 11.43 per cent 2015 in view of the large floating stock and outstanding.

The floating stock of the 11.43 per cent 2015 is Rs 12,000 crore as against Rs 3,000 crore in the 10.47 per cent 2015 and Rs 5,000 crore in the case of 7.38 per cent 2015.

Trading volumes: Preference was also evident from large trading volumes in the 11.43 per cent where it averaged Rs 10 crore as against less than Rs 1 crore deals in the 7.38 per cent, even in a thin market where overall trade volumes were just around Rs 3,500 crore.

Traders said that the interventions by the RBI not withstanding, the yield outlook remained bearish. This was evident from the wide spreads. Spreads between one year and 24 years were about 150 basis points.

The bearish trend was partly driven by developments in the international markets.

Fed rate hike: The Federal Reserve Board has hiked the fund rate to 2.25 per cent and further creeping hikes have not been ruled out.

The hike has now made US treasuries more interesting to some of the institutional investors. This in turn has resulted in a slow and steady selling, expected to accelerate in the coming weeks.

In fact, some institutional investors have already locked into short-term forward premia. Short forward premia, one month and under, is already close to 3 per cent.

This partly stems from the FII rush to cover their exits ahead of the year-end.

But the exit itself has already begun. Foreign exchange reserves dropped by over $1 billion in a week, after topping $130 billion the previous week.

Inflation rate: Traders said that what has also added to potential for a weakening of yields was the high inflation rate.

Inflation continued to be upwards of 7 per cent, and real yields up to 12 years continued to remain in the negative zone. Besides, credit growth continued to remain buoyant. This was evident from the high credit-deposit ratios of banks, which is now well over 63 per cent powered by a Rs 10,000-crore non-food credit offtake.

Govt borrowings: The major worrying factor among bankers was the potential of a bunching in Government borrowings. So far, about Rs 13,000 crore of auctions by the Government has been deferred.

This was despite the fact that the fiscal targets have already been breached.

More Stories on : Debt Market | Foreign Institutional Investors

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
LIC agents seek more welfare measures

Bankrolling of Govt borrowings slackening

Bond traders cautious as FIIs begin offloading

Rates should take a breather for now

SAS Institute targets public sector banks

Prudential liquidator assures early settlement