The Hindu Business Line : Life insurers book gains in equities; invest in bonds

BONDs were mixed in last week's trading, influenced by a combination of hardening international oil prices and rising domestic liquidity in the short-term.

Bankers said bonds were also helped by the intervention of life insurance companies, particularly the Life Insurance Corporation. LIC, traders said, picked up securities for maturities beyond 10 years.

Many of the life insurers, traders said, booked profits in the stock market rally and moved into government securities as part of the continuous process of portfolio reallocation.

Some tightening was inevitable ahead of the redemption of India Millennium deposits this year-end, said tradersThe tightening was evident from the low mop-up in the two liquidity adjustment facility auctions. The mop-up was barely Rs 4,475 crore. In fact, during the week, some banks had tapped the RBI's repo window.

The hardening also reflected in the weekly Treasury bill auctions. At the 91-day T-bill auction, both the cut-off and the weighted yields were 5.78 per cent. The previous week, the yields were 5.65 per cent. At the 182-day T-bill auction, the yields moved up five basis points over the previous auction to 5.95 per cent.

The tightening resulted in a firming of the 10-year yield to maturity (YTM). The 10 year YTM moved to 7.17 per cent on a weighted average basis last weekend up from the previous week's 7.12 per cent.

Insurers and funds took full advantage of the tightening and went on a buying spree, traders said.

Among the securities insurers targeted included the 10.71 per cent 2016 which was picked up at a yield of 7.28 per cent and the 10.25 2021 at 7.37 per cent. Similarly, the funds picked up the 10.71 per cent 2016 at YTM of 7.24 per cent and the 9.85 per cent 2015 at 7.22 per cent.

The undertone, however, remained feeble last week, apparent from the low trading volumes. Daily trading volumes were barely Rs 1,500 crore, and mid-week they had dropped to less than Rs 1,000 crore.

But traders said that a rally might be under way in the short-term. This was evident from the narrowing spreads between one year and 23 years. Last week-end, the spreads narrowed to 147 basis points, the lowest this financial year. The spreads the previous week were 155 basis points.

Besides, last week, at the auctions of the Kerala State Government security, the yield was 7.33 per cent.

The bids received for the security was three times the notified amount. The weighted yield of the security was only 10 basis points more than the weighted 10-year YTM. This was the lowest spread for a State Government security during the current year, traders said. The life insurance companies lifted the entire lot, traders said.

However, another pointer to a potential rally was the foreign currency inflows. For the latest week, the inflows were $845 million, reversing a continuous decline. That more inflows were likely to take place was evident from the hardening of the rupee against the US dollar.

Despite the RBI communicating that the rupee was overvalued against the dollar, the rupee is poised to strengthen further in the coming weeks on the back of current and non-debt capital account flows.

Export-led inflows had taken place during the last few weeks, as some of them took advantage of the exchange rate depreciation.

What is also likely to help the bond markets in addition to this reserve money expansion was the last week's indication that the US Federal Reserve was unlikely to resort to any more rate hikes.

But the critical driver for bond markets was credit demand. Mr V.K. Chopra, Chairman and Managing Director of Corporation Bank, said, "Banks' focus is on return on assets. Credit fulfils this criteria." In fact, this was one of the major factors that were driving banks to credit and less to investments.

Accordingly, the target of most banks was to bring down the investment deposit ratio close to 25 per cent, the prescribed statutory liquidity ratio.

Some banks like Corporation Bank are already within striking distance of the figure with an ID ratio of 32 per cent.

Currently, more banks are sellers for securities than buyers, and deploying the funds in credit. As a result, nominal CD ratios are close to 70 per cent for most banks.

Ddespite this focus, a short-term rally in the markets appeared imminent. This was on account of large divestments and IPOs planned by several companies. All these issues were likely to push up domestic liquidity and translate into a slight softening of yields.

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