The Hindu Business Line : Bond traders don't see a bull run

Traders said that the inflows were partly driven by domestic and non-resident Indian deposits. NRIs have slowly resumed their remittances. Besides, what also helped the markets was the slowdown in credit offtake.

Oil cos stay away: Besides, oil companies abstained from the markets. Traditionally, oil companies' entry tends to drive bond prices down and their absence in the opposite direction.

Most oil companies are under the belief that crude prices would weaken further in the coming weeks.

As a result, some oil companies were hoping to exit from their forward purchase contracts.

India currently imports the equivalent of about 1.9 million barrels per day.

In fact, much of the imports have already been tied up at high prices. And with exit price from such contracts high, the Government and oil companies are not in a position to bring down the prices till such time the bulk of the contracts expire.

At least 60 per cent of the crude oil imports are made on a forward contract basis. The forward contract prices are linked to the Dubai crude prices. These factors helped the liquidity surge in the markets.

RBI's underwriting: Liquidity surge also helped the twin Government issues.

There were no devolvements, although the RBI did keep a generous underwriting to ensure the success of the issue. The 9.39 per cent 2011 was placed at 6.52 per cent and the 7.50 per cent 2034 at 7.11 per cent.

Moreover, yield on the 91-day T-bill auction last week was down to 5.20 per cent from previous week's 5.41 per cent. The 364 T-bill yield, however, remained almost steady at the previous auction levels at 5.61 per cent.

But the 10-year yield to maturity (YTM) on a weighted average basis dipped to 6.65 per cent from previous week's 6.77 per cent.

Bull run unlikely: Yet, despite this drop in the YTM, not many traders are convinced about the possibility of another bull run in the markets. One banker said, "The conditions for a bull run simply don't exist."

One reason being that the RBI was not interested in any softening trend in the markets.

Besides, traders said that while volumes picked towards to the end of the week, not many traders were prepared to accept it as a possibility of a rally.

That the bond markets were in no mood for a big rally was evident from the wide spread between the 91-day and the 364-day T-bill yields.

The spread between these two T-bills were over 42 basis points.

A bull run is portended normally by shrinking spreads at the short end of the yield curve.

In April 2004, when bond prices had peaked, the spreads between the 91-day and 364-day T-bills were thin, barely three basis points.

Both these yields were also below the then prevailing reverse repo rate of 4.5 per cent. Presently, both of them are above reverse repo rate.

The 364 T-bill yield is closer to the bank rate.

Trade volumes: Trade volumes towards the end of last week were upwards of Rs 4,000 crore. Traders believe that this surge in volumes was only an aberration.

Despite this sudden swell in volumes, the outlook remains bearish for bonds. This was apparent from the wide spreads between one year and 23 years. This spread was still about 138 basis points last week, almost unchanged from the previous week.

Inflation continued to be close to 6.4 per cent, with the Government unwilling to revisit oil prices. As a result, 5-year yields continued to be negative.

Hedge funds exit: Foreign exchange markets are beginning to face some turmoil over the exit of some of hedge funds. The exit of the hedge funds was driven by the possibility of another hike in the US Fed funds rate. Fed funds are currently at 2.25 per cent.

Expectations were that the rates would rise by another 25 basis points at the next Fed meeting.

Moreover, many of the Asian central banks are in a severe predicament over their large foreign exchange reserves.

These reserves were parked in US Government securities, mostly long term.

Further hikes would imply that their dollar-bond investments would depreciate, resulting in large losses.

The RBI and some of the trading banks and GIC which holds about $15 billion worth of US Government securities have already begun liquidating them and moving to the short end.

Besides, credit-deposit ratio continued to remain at 63 per cent. Investment-deposit ratios also rose slightly last week to 44 per cent from 43.6 per cent.

Consequently, bankers are likely to to hike rates for long-term deposits in the coming weeksto support an increase in credit.

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