The Hindu Business Line : Insurer interest keeps bond market buoyant

Bankers said the buoyancy in the markets was despite their restricted presence. But the Reserve Bank of India was not worried about the low interest in government securities from banks as the Life Insurance Corporation of India and other private sector life insurersappeared to have an almost insatiable appetite for long-dated securities.

But inflation driven by international oil prices, which hovered close to $ 55 per barrel, continued to be a major worry among bankers.

However, none of the large oil companies ventured to take forward cover. Bankers said the companies preferred to come into the market only if there were a possibility of large-scale exchange rate depreciation. At least 60 per cent of the crude oil imports were linked to Dubai or Oman prices, where settlement is done on the basis of six-month average prices. Only the remaining 40 per cent is done on the spot basis.

Oil companies have, in recent times, preferred to operate in the spot foreign exchange market, to save on premia. Traders said some hedge funds also continued to move out of the domestic markets, preferring to remain liquid, ahead of the meeting of the Federal Open Market Committee. This led to a slight tightening of liquidity last week.

Bankers said that the tightening was also on account of the successful placement of two papers during the week, the 7.37 per cent 2014 and the 10.25 per cent 2021. Both these papers were fully subscribed. The issues were placed at 6.91 per cent and 7.45 per cent.

As a result, the mop-ups through weekend and daily reverse repos dropped to Rs 13000 - Rs 14000 crore, unlike in the previous week when it was double the figures.

Besides, the yields at the t-bill auctions also showed a slight hardening trend. At the 91-day T-bill auction, the yields hardened slightly to 5.24 per cent (5.20 per cent). Similarly the yields on the 364-day T-bills rose to 5.60 per cent (5.56 per cent).

Bankers said that many primary dealers had made large profits in picking up the g-secs from Monday's auctions, as the yields of the 7.37 per cent 2014 and the 10.25per cent 2021 dropped to 6.7 per cent and 7.15 per cent on Friday last.

The buoyancy in the market resulted in the 10-year YTM remaining steady at 6.98 per cent. Insurer interest in the high coupon securities such as the 9.85 per cent 2015 and the 11.43 per cent 2015 pushed up prices and lowered yields . These securities, bankers said, were placed at YTMs of 6.92 per cent and 7.12 per cent. Two weeks ago, these securities were trading at YTMs of over 7.30 per cent.

High coupon securitieswould give the insurers good coupon flows for deployment in the equity markets, bankers said. In fact, some of the insurer funds in the equity markets were actually coupon flows from government securities, since the redemption/ claims pressures were low.

The current firm trend, traders said, was not likely to be sustained. Conventional indicators pointed to short-lived bond market buoyancy. The average daily trading volumes remained below Rs 3,000 crore per day and the intra tenor spread remained high. This spread was 170 basis points between one year and 23 years.

Besides, inflation eased to 5.2 per cent. This allowed the one-year real yields to rise to 50 basis points. This is the highest real yield in almost six months. Traders said that this was still far lower than internationally acceptable real yields of 1.5 per cent.

Moreover bankers said they still continued to derisk their portfolios, shrinking the average maturity of their respective investment books.

Most public sector banks had shrunk their investment books to under 3 years, This was inclusive of their holdings of securities in the held to maturity categories.

The bulk of their holdings in the HTM (held to maturity) categories were the high coupon securities picked during the last decade and expected to mature during the next few years.

The derisking during the last two weeks was a profitable operation, unlike in the previous few weeks on account of the LIC/private sector life insurer appetite.

Bankers said that this had ensured that most of them were able to meet the liquidity requirements for credit offtake without any large-scale increase in interest rates.

Banks funding the credit through sale of securities meant they would be able to sustain high credit-deposit ratios.

Credit-deposit ratios are at an all-time high of 66 per cent for the banking sector. Incremental CD ratios were over 100 per cent, despite the lean season. The offtake during the last few months, bankers said, was driven by corporate term loans for capacity expansion purposes.

However, the possibility of a liquidity tightening was real, partly led by developments in the foreign exchange markets due to oil price increases and FII shifts to home turf, they added. Foreign exchange reserves dropped again due to these shifts by $1.168 billion to $138.66 billion.

Bankers said that they would therefore have to look more at domestic deposits to sustain the credit offtake.

Some banks have already begun wooing depositors. Rates have not been revised as yet. That is now expected to happen and boost savings.

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

Stories in this Section
Aviva shows interest in AMP Sanmar Life

Aviva upbeat on India, plans major expansion

Insurer interest keeps bond market buoyant

APSFC steps up disbursements to entrepreneurs

Huge withdrawals made in May-end to avoid tax trail