The Hindu Business Line : Insurance cos' buying supports bond markets

Traders said the buoyancy was mostly on account of the presence of life insurers and foreign institutional investors Insurers sold some of their equity holdings in the stock market taking advantage of the high prices, since the Sensex was on a roll powered by the presence of FIIs.

As a result, traders said the influx of FII funds was more than able to meet the demand from oil companies. Oil prices went up to $60 a barrel. This implied that the weighted average price of crude imports, around 1.8 million barrels per day, was close to $53 a barrel or about $395 per tonne.

Traders said the presence of the oil companies in the markets created some tightness towards the end of the week,evident from the reduced mop-ups in the reverse repo auctions. At the three-day reverse repo auction, the mop-up was only about Rs 9,000 crore.

Moreover, yields at the Treasury bill auctions remained firm. The yield on the 91-day T-bill was 5.32 per cent, similar to previous week levels. The yield on the 364-day T-bill was 5.62 per cent.

The yield spread between the two T-bills also narrowed.

Narrowing spreads: Traders said that the narrowing of spreads was also partly on account of the presence of corporates and urban cooperative banks.

Most of these institutions appeared to have lost interest in the low yield 91-day T-bill due to the relaxation of the ready forward guidelines. Also, narrowing of yields was also due to the tightening of short-term liquidity.

Yet, the 10-year yield to maturity softened slightly to 7.03 per cent on a weighted average basis, from the previous week's 7.06 per cent. Insurers' focus: Insurance companies focussed on the 11.43 per cent 2015 and the 10.47 per cent 2015 papers. Both these securities were picked up at YTMs of 7.06 per cent and 7.11 per cent respectively towards the week-end.

These two securities actually firmed up and neutralised the hardening of the yields of the benchmark 7.38 per cent 2015 paper.

The insurers' intervention also ensured the success of the auction of the sovereign paper - 7.49 per cent 2017. Insurers picked up this paper at an YTM of 6.88 per cent.

The outlook remained positive despite the slight tightening of liquidity,,evident from the drop in spreads between one year and 23 years.

These spreads were 159 basis points, down from 165 basis points the previous week. Daily trading volumes remained low around Rs 3,000 crore.

Despite these low volumes, traders expect the bond market to remain at current levels in the coming weeks, partly on account of the low inflation levels of 4.33 per cent.

Real yield: At this level, the real yield for one year was 1.4 per cent aligning it within internationally accepted real yield levels.

Besides, foreign exchange inflows also continued mostly from non-debt capital and current accounts.

Inflows have picked up and are currently around $100 million daily.

As a result, forward premia for six months and one year were at 1.4 per cent and 1.3 per cent respectively.

Forward premia: On the other hand, short-end forward premia - one month and three month - were 1.7 per cent and 1.5 per cent respectively.

The reason for the high short end premia was partly the cover taken by oil companies.

Oil companies' hedging was mostly for one month.

This was in anticipation of short-term volatility from FII/hedge funds movement ahead of the meeting of the Federal Open market committee next week.

Fed rate hike: The Fed is widely expected to hike funds rate by 25 basis points.

Traders said that this hike had already been discounted by the markets and was unlikely to have any impact on foreign currency flows.

According to the RBI's weekly statistical bulletin, inflows for the latest reporting week were $1.04 billion, negating the drops during the last three weeks.

Traders said that if these inflows continued at the current pace, sterilisation was again likely to become a problem.

Rupee appreciation? In order to control domestic liquidity impact, the rupee was likely to be allowed to appreciate slightly, traders said.

This would also somewhat take away the inflationary impact of high oil prices, traders added.

Domestic interest rates are unlikely to be raised despite credit offtake expanding at 30 per cent on a year-on-year basis.

This implied that the entire banking sector was operating at a high credit-deposit (CD) ratio.

Nominal CD ratios were 65 per cent and incremental ratios were close to 100 per cent. Investment deposit ratios, however, remained at 44 per cent as few banks were interested in picking up securities now, unless there was a big increase in demand and time liabilities.

The growth in this component was still slow, since other financial products such as mutual funds and insurance offered better returns.

Corporate deposits have moved over to T-bills.

Bankers said that if the current momentum of credit growth were to be sustained, deposit mobilisation efforts should be be intensified through a realignment of rates for long-term funds.

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