The Hindu Business Line : Market signals hardening yields

Traders said the hardening of yields was driven by the exit of some foreign institutional investors from the domestic market ahead of their accounting year. Along with the FIIs, some insurance companies were also selling bonds, bankers said.

As a result, liquidity in the market has begun to tighten.

In fact, during the daily one-day repos, the amounts mopped up were less than Rs 10,000 crore. The three-day repo showed a mop-up figure of Rs 24,000 crore. Bankers said this high mop-up was on account of a strike on Thursday and the half-yearly account closing on Friday.

Shortfall in mop-up: The tightening was also becoming evident from the shortfall in the mop-up through the 91-day Treasury bill. While the notified amount inclusive of the market stabilisation scheme was Rs 4,000 crore, the amount raised was barely Rs 2,100 crore.

However, the 364-day T-bill was fully subscribed and the full amount inclusive of MSS was raised. Traders said that one of the major reasons was that many preferred parking the funds in the 364-day T-bills in anticipation of higher yields. This was a view affirmed when the cut-off yields were fixed. The cut-off yield on the 91-day bill was 5.49 per cent, a steep 29-point rise from the previous week. Similarly, the cut-off yield on the 364-day bill was fixed at 5.80 per cent. Not many had anticipated such high cut-off yields was evident from the wide spreads between the weighted average and the cut-off yields.

The weighted average yield for the 91-day was 5.33 per cent.

Clearly, the signals delivered were that the short-term rates could rise in the coming weeks. The signal had the desired effect, and the weighted average 10-year yield to maturity firmed up to 7.14 per cent last weekend from 7.09 per cent the previous week.

Insurers stay away: Traders said that the outlook on yields was not positive either, evident from the fact that insurance companies, who are traditionally buyers of long term securities when yields rise, were very restrained during the week.

In fact, yields at the long end, 10 years and above actually showed a steep rise because of insurers' absence. The yield rise for 12-year and 20-year securities was at least 12 basis points over the previous weekend.

Expectation of hardening yields was also apparent from the wide spreads between one year and 28 years. This spread was 171 basis points, up from the previous week's 166 basis points. Besides, trade volumes were also low at less than Rs 2,000 crore per day. Normally spreads narrow when a bull market is expected and widen when yields are expected to harden.

This sentiment was partly driven by inflationary expectations. Traders said that inflationary expectations were high, entirely on account of high energy prices and mounting and hidden subsidies on retail petroleum product prices. Inflation for the latest reporting week was 3.75 per cent and the one-year real yields were 2 per cent, within international trends.

But inflation is now increasingly under question since there was a wide variance between provisional and final inflation data. The final data showed a difference of at least 30 basis points, implying that it was higher than the provisional estimates.

Short forwards to rise: Traders said that the non-oil current account surplus was under stress and was likely to lead to a rise in the short forward premium, particularly for one month.

In fact, one month forward premium is already above one per cent. This has lead to an inversion since the three months, six months and 12 months forward premia were lower than the one-month premia.

This trend conveyed that oil companies are taking cover only for the short-end. The general expectation was that in the long term, foreign exchange inflows would offset the oil-driven demand. Besides, in the six-month period, oil prices were expected to taper off. With this optimism at the long end, exchange reserves sank for the second week in succession by over a $ 1 billion. Last week, reserves dropped by $1.205 billion.

Bankers' fear: Bankers also fear that the high oil prices could lead to more rounds of oil bonds if the prices are not passed on to the consumer. Attempts by oil companies to liquidate their allotments to some of the banks have so far not been successful, partly in view of the paper's non-SLR status and bankers' disinterest in low-coupon securities.

Moreover, credit continued to expand. Credit growth for the latest reporting week was 33 per cent, driven by non- food credit. Incremental credit-deposit ratios are about 100 per cent. But, despite this increase there has been little build-up of incremental non-performing assets.

As a result, bankers' focus was on pushing up credit where the spreads are as high as 8 per cent over the weighted average cost of working funds.

Focus on deposits: So far, credit has been driven by sale of investments. But banks are halting sale of investments and instead have shifted to deposits to sustain the credit growth tempo. This is expected to push up competition for deposits and consequently the rates.

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

Stories in this Section
`Home loans to be dearer if priority tag is removed'

Market signals hardening yields

Corporation Bank initiative in Mangalore

SBM (Coimbatore) branch surpasses deposit target

Personal loans offtake rising fast: Assocham

Corporate governance norms soon for PSU banks