The Hindu Business Line : Insurers see bond yields rising, stay away

Traders said that many were expecting another hike by at least 25 basis points in the Federal funds rate when the US Federal Reserve Board meets on August 8. This expectation triggered a pullout by foreign institutional investors during the week that lead to the rupee depreciating by about 4 per cent on an annualised basis. The impact did not, however, reflect in the forward premia that was offset by expected inward flows both on the current and non-debt capital accounts.

The non-debt capital accounts, traders said, were particularly from large flows from non-resident Indians into the domestic equity markets.

Besides, bankers said that oil companies also stayed away from the foreign exchange markets.

Liquidity surge

But there was a liquidity surge at the three-day weekend liquidity adjustment facility auctions. The RBI mopped up at least Rs 48,355 crore through the reverse repo window. The surge in the reverse repo mop-up was largely triggered by inflows from life insurance companies through unit linked insurance plans (ULIPs). In fact during the last few weeks, life insurers had large accretions through ULIP growth funds. Most of these funds were parked in current or short-term time deposits of a maximum of 15 days. These deposits gave yields of about four per cent for the insurers, whereas banks parking the funds in the reverse repo window earned six per cent, earning a small spread of one per cent in the process.

However during the weekly treasury bill auctions, this liquidity failed to pull down yields. The 91-day treasury bill yields remained steady at 6.44 per cent, the same level as last week. But the 364 T-bill yield at 6.99 per cent was close to the repo rate of 7 per cent. Yet despite the upward movement in T-bill yields, traders said the market stabilisation scheme targets were met.

Buyers stay away

Bankers said that the steady yields were largely on account of the absence of buyers. The absence was evident from the low daily volumes of barely Rs 650 crore. Buyers such as insurance companies preferred to stay away from the markets anticipating a hardening of yields in view of soaring oil prices. In fact, many of them were expecting banks to unload some of their long-dated high coupon securities to further derisk their portfolios. Among the securities that had emerged from the banks investment portfolios and available was the 10.25 per cent 2021. The Life Insurance Corporation picked this security up 8.56 per cent, bankers said.

Outlook bearish

Bankers said that the outlook for yields remained bearish. This was evident from the high buy low spreads that remained close to 15 basis points. In addition, spreads between one year and 29 years, remained high at 180 basis points, indicating of low interest in the long-term securities. Some private sector life insurers picked up small volumes of the 2034 and 2035 securities. Given the thin market, small volumes helped drive down yields on the 7.50 per cent 2034 and the 7.40 per cent 2035. What pointed to a bearish market were high real yields. With inflation at 4.67 per cent, the one-year real yield remained high at 2.33 per cent, well above the internationally accepted level of 1 per cent.

The low interest in securities was also largely on account of bankers compliance with the statutory liquidity ratio (SLR). Almost all the banks have SLR securities holding of close to 30 per cent. Of this, almost the entire quantum of SLR securities of 25 per cent of the net demand and time liabilities was in the held to maturity category. This category has been completely derisked, bankers said. Accordingly this trend was likely to impact next week's twin auctions for raising Rs 9,000 crore through reissue of the 9.39 per cent 2011 and the 7.59 per cent 2016 per cent security. Pricing, therefore, was likely to be aggressive, bankers said. Indications are that bids were likely to be about 8 per cent for the former and upwards of 8.3 per cent for the latter.

Bankers said that this was on account of the low interest in long duration securities. For short-term deposit accretions, the parking was mostly done only in short-dated treasury billsLong-dated term deposit accretions have not yet begun. This was despite some of the banks offering high returns on structured term deposits, as high as 8 per cent for 290 days. Public sector banks have still not entered the competition through deposit rate hikes and are instead focussing on enhancing retail depositor base for sourcing long-term funds. But deposit rate hikes are not very far off.

More Stories on : Debt Market | Fixed Deposits | Govt Bonds

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

Stories in this Section
The changing face of Indian banking

Of rising rates and shaky foundations

Time for short-term funds?

Insurers see bond yields rising, stay away

New Karnataka Bank facility

Central Bank charts revival plan

Home loan rates: Just grin and bear!

City Union Bank's deposit schemes

Bancassurance model pays off for SBI Life

Basel II- The challenge for risk managers