The Hindu Business Line : Bond traders bet on yields rising further

In fact, the unwinding of MSS and the large credit offtake contributed to pushing down yields at the weekly Treasury bill auctions. The cut-off yield on the 91-day T-bill auction softened to 6.52 per cent. The weighted average yield fell below the repo rate for the first time in five weeks to 6.48 per cent. Similarly, the cut-off yield on the 182-day T-bills also softened to 6.61 per cent. At the weekend repo auctions, bankers took recourse to the RBI's window to the extent of Rs 11,000 crore, considerably lower than the intra-week when the amount drawn was in excess of Rs 20,000 crore. Bankers said that this was mostly for arbitrage purposes.

Resorting to repos

Many banks took advantage of the high call rates by resorting to repos. In addition, some of the foreign banks were also taking advantage of the high short-term rates by resorting to swaps.

Bankers said that this was one of the major factors that was driving up the forward premium despite the large inflows. Currently, one-month forward premium is close to 4 per cent and three-month premium was about 2.4 per cent.

Along with these factors, credit offtake continued to remain buoyant and prevented yields from softening, despite the announcement of the borrowing programme for the next fiscal.

Govt borrowings

The Government hoped to raise at least Rs 89,000 crore in the first half.

But traders remained unruffled by the announcement. The 10-year yield to maturity softened towards the weekend to 7.40 per cent on a weighted average basis, down from the previous week's 7.42 per cent.

A trader said some banks acted in concert to prevent portfolios from depreciating, ahead of the yearend. The undertone was firm, evident from the increased trade volumes which rose to a little over Rs 1,000 crore. The spread between one year and 29 years was 100 basis points, since banks, life insurance companies and provident funds stepped in to make purchases on fears that yields were unlikely to remain at current levels.

Little scope

However, there was little scope for yields to soften, traders said. This was evident from the high one-year real yields, which is close to 3 per cent.

Yields remained closely aligned to expected inflation rates, bankers said. Besides, more banks are beginning to hike deposit rates to meet the credit offtake. The hikes are expected to push up their weighted average cost of working funds. With yield on credit close to 10 per cent, few banks were interested in government securities. Bankers are targeting high average yields on assets of at least 4 per cent above the weighted average costs.

Traders said that yields on G-Secs, as a result, were likely to rise further in the coming weeks. Banks already had excess SLR securities, evident from their high investment-deposit ratio, currently at 38 per cent.

Funding credit

They were prepared to finance their credit expansion through repos or CBLOs . Both the routes are preferred since neither of them impacted SLR status. This allowed banks to sustain high incremental CD ratios in excess of 100 per cent that could be refinanced with deposit inflows.

Consequently, traders said expectations are that some reductions in the cash reserve ratio would take place. This would also partly offset the impact of a further tightening in liquidity.