The Hindu Business Line : FIIs' selling rattles bond market

BONDS were steady amid listless trading last week as traders preferred to remain cautious in view of the sudden surge in crude oil prices in the global markets.

Traders said that the sudden selling wave by foreign institutional investors also rattled the market. Several FIIs and overseas corporate bodies liquidated their investments in both equities and debt papers.

The liquidation pushed up the demand for foreign currencies. Besides, more Government borrowings are expected during the coming weeks, especially in view of the shortfall in indirect tax receipts.

Hedging by oil cos: In addition, oil companies were also present in the market, traders said. Oil companies, fearing the possibility of a further rise in oil prices, resorted to hedging of their foreign currency requirements. The simultaneous demand by both FIIs and oil companies pushed up the dollar and the forward premia in the markets.

T-Bills auction: In the T-Bills auction, the yields on the 91-day rose to 5.37 per cent last week, up from the previous week's 5.32 per cent. Similarly, at the 364-day T-Bill auctions, yields hardened to 5.77 per cent, up from 5.61 per cent.

The ten-year yield to maturity (YTM) also followed a similar trend. The ten-year YTM was 6.79 per cent on a weighted average basis last week, from 6.73 per cent. Inflation data: The hardening trend continued despite positive inflation numbers. Inflation as measured by the wholesale price index was down to 5.6 per cent. The inflation retreat pushed up real yields. Real yields are now positive, for the first time in six months, right from one year onwards. The one-year nominal yield is currently 5.8 per cent, implying a positive real yield of 0.2 per cent.

However, despite positive real yields, traders are not very certain of a retreat in nominal yields.

Trading volumes: The undertone was weak, evident from the low trading volumes, at barely Rs 2,000 crore. The outlook also remained bearish. Traders said that this was because some of the large buyers like insurance companies abstained from making any purchases. Some life insurance companies actually sold securities to meet their claims liabilities.

The securities sold included the 10.71 per cent 2016, sold at yields of close to 7 per cent. But bankers said that there were also several repurchase operations done by banks to meet the liquidity demand.

Foreign banks operating in the country mostly resorted to such repos. This was partly to meet their statutory liabilities and also fund their mismatches. The preferred securities for these ready forwards included the 9.85 per cent 2015 per cent. This security was placed at yields of about 6.85 per cent.

Inter-tenor spreads: What reinforced the weak outlook were the wide inter-tenor spreads. These spreads widen in a bearish market and narrow in a bull market. The spread between the reverse repo and the 364-day T-bill was over 100 basis points.

Similarly, the spread between one year and 23 year was 164 basis points, a steep rise over last week's 125 basis points.

Traders said that such a situation is likely to continue.

At best, traders said yields were likely to remain ranged between 6.75 per cent and 7 per cent for some time, before the downtrend resumes. One of the major factors driving this downtrend was the FIIs. FIIs are expected to sell in anticipation of a further hike in dollar interest rates.

Fed rate hike: Traders expect the US Fed to hike rates by 25 basis points. As a result, some FIIs were becoming more dollar liquid, anticipating pick-up in US Treasuries. FIIs' moves were evident from the wide forward premiums and the falling rupee against the dollar. During the last few weeks, the rupee has depreciated by at least 70 paise against the dollar to about 43.90. Forward premia for one month was 3.3 per cent and for six months it was 2.8 per cent.

In fact, most oil companies were rushing for only one-month hedge, leading to a wide spread between one month and six months.

Forex accretions: The demand for foreign currency has reduced the accretions to the exchange reserves and somewhat taken the load off the RBI. Accretion for the last reporting week was barely $266 million.

Credit offtake continued its rise. C-D ratios continued to remain at 63 per cent with the non-food credit offtake of Rs 9,000 crore during the week. If this trend continues, bankers indicated there would be hike in deposit rates, particularly at the long ends, three and five years.

Most credit offtake is at this end, especially for project loans. But the corporate bond market has shrunk, since loans are cheaper than bonds. Effective cost of loans is about 8 per cent.

The effective cost for bonds would be at least one per cent higher.

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