The Hindu Business Line : Bankers shuffle long-dated bonds

BONDS remained steady last week in lacklustre trading amid renewed pressure on international oil prices and concerns over a potential inflationary surge.

Traders said some banks had started preparing their third quarter results which is expected to be positive despite the slight hardening of rates as compared with the second quarter.

The firming up of rates was on account of higher credit offtake during the third quarter, traders said.

The major worry in the bond markets was the rising crude prices. International oil prices hardened to $59 a barrel. This meant that the weighted average cost of oil purchases had gone up to about $55-56 a barrel, implying that the oil bill was $110 million per day. But the increase in prices did not result in any big rush by oil companies into the markets, traders added.

Limited impact: As a result, the impact on the foreign exchange markets was limited and there was little movement in yields.

Even the surge in forex reserves failed to impact the yields.

Bankers said this was partly on account of the Rs 8,000-crore mop-up by the government towards the beginning of the week through two bond reissues - the 12-year 8.07 per cent 2017 and the 30-year 7.4 per cent 2035.

Insurers' mop-up: The bonds sailed through without any difficulty, partly on account of the large mop-up by insurers.

The 12-year security was lifted at 7.24 per cent and the 30-year issue at 7.55 per cent. However, the weighted average yield was higher than the cut-off yield in the case of the 12-year issue at 7.26 per cent.

For the 30-year security, the weighted average yield was lower at 7.54 per cent. Bankers said this was on account of the preference of insurers for long-term securities.

Similarly, during the weekly Treasury bill auctions, the divergence was evident. The cut-off yield on the 364-day T-bill at 6.01 per cent was higher than the weighted average yield of 5.98 per cent.

On the other hand, both the cut-off and weighted yields were identical for the 91-day T-bill at 5.65 per cent, down from 5.74 per cent the previous week.

The short-term yields were pushed down by the liquidity surge, evident from the mop-up during the weekend reverse repo auction.

At the first auction, the mop-up was Rs 6,335 crore and in the second auction it was Rs 5,125 crore.

High liquidity: The high liquidity in the system was partly driven by redemptions of the market stabilisation scheme securities and some corporate tax refunds, all of which have found their way back into treasury bills and to some extent into equity markets.

Despite the liquidity overhang, the 10-year yield to maturity (YTM) firmed slightly to 7.12 per cent on a weighted average basis.

The hardening was driven by bankers' shuffling of long-term securities for short-dated ones.

Insurers clearly took advantage of the situation during the week, in driving hard bargains in switches.

Insurers' choice: Some of the securities preferred by the insurers included the 10.71 per cent 2016 and the 10.25 per cent 2020.

These securities were settled at YTMs of 7.28 per cent and 7.35 per cent respectively.

Bankers in turn picked up one-year and two-year securities, particularly the 2007 and the 2008 series at YTMs ranging from 6.25 per cent and 6.35 per cent.

As a result of this chase for short-term securities, spreads narrowed to 155 basis points for 23 years against the previous week's figure of 165 basis points.

But the high liquidity failed to translate into trading volumes in the markets.

Trading volumes continued to remain at less than Rs 1,500 crore per day, clearly indicating that the outlook for the market was anything but bullish.

Mr Kanta Kumar, Chairman and Managing Director of Syndicate Bank said, "Interest rates will remain at current levels at least till the end of this fiscal. There is enough liquidity in the system."

Most of the liquidity stemmed from reduced government borrowings and redemptions.

In fact, most traders expect the government borrowings to be far lower than the budgeted estimates for the current year.

Govt borrowings: The targeted borrowings for the current year were estimated at around Rs 89,000 crore, excluding the market stabilisation scheme.

Traders said the increased tax realisation had prompted the reduction in the government borrowings.

Besides, recoveries of State loans also resulted in yielding better revenues to the Centre. States were repaying Central loans through a combination of market borrowings and additional small savings inflows.

Bankers said there are worries over inflation.

With inflation at 4.54 per cent, the one-year real yield translates to 146 basis points. This level limits the scope for any fall in nominal yields in the short term.

Forex inflows: Foreign inflows have resumed after forward premia went up during the last few weeks and exchange rate dipped to 46 per dollar.

For the latest reporting week, the inflows were at $921 million after a four-week dip.

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