The Hindu Business Line : Bonds soften as credit offtake slows down

Bonds softened last week in thin trading as credit offtake slowed down ahead of a long holiday season. Traders said that volatility in the foreign exchange market had little impact on bonds, as domestic factors overwhelmed exit by foreign institutional investors.

In fact during the week, there was hardly any RBI intervention. The only intervention was to pump in liquidity through reverse repurchases. Net outflow on account of selling by foreign institutional investors was $907 million last week. This has prompted exporters and some potential foreign direct investors to take cover. As a result, one-month forward premia dropped below one per cent to 0.61 per cent last week. The previous week it was 1.75 per cent. Forward premia for three, six and 12-month also narrowed to 1.01 (1.73), 1.42 (1.88) and 1.11(1.40) per cent respectively.

The liquidity support was mainly on account of sales by foreign institutional investors. At the weekend liquidity adjustment facility auction, banks took recourse to the RBI’s repo window for Rs 22,370 crore. There were about 20 banks and primary dealers who took recourse to the RBI’s repurchase window. But bankers said the recourse to the repo window was also largely driven by the refiners accessing their credit lines for settling their maturing oil import bills. In fact, refiners’ recourse also resulted in hardening of rates at the Collateralised Borrowing Lending Obligations markets, where the weighted average rate for the weekend was 6.88 per cent, though the rate was considerably lower than the RBI’s repo rate of 7.75 per cent.

Liquidity tight

But at the weekly Treasury bill auctions, the cut-off yield on the 91-day T-bill auction softened to 7.35 per cent, down from the previous week’s 7.44 per cent. The weighted yield though remained level with the cut-off yield. The RBI for the third week kept the notified amount low at Rs 500 crore in anticipation of tight markets.

There were no T-bill issues under the Market Stabilisation Scheme. Competitive bids for the 91-day T-bill were Rs 3,179 crore and non-competitive bids Rs 7,300 crore. The actual retention was Rs 7,800 crore. At the 364-day bill auction, the trend was identical with the cut-off yield at 7.66 per cent and weighted yield 7.65 per cent. Despite the high bids at the auction, the narrow spreads between the cut-off and the weighted average yields indicated tightness in liquidity.

However, this anticipation failed to reflect in the 10-year Yield-to-Maturity (YTM). The 10-year YTM on a weighted average basis dropped to 7.87 per cent, down four basis points from the previous week’s 7.91 per cent.

Weak undertone

The undertone was weak, which was evident from the drop in average daily trade volumes. Daily trade volumes remained thin last week at just Rs 4,400 crore, almost at the same level as the previous week. Bankers said that some of them sold their long dated securities. These included 7.95 per cent 2032 per cent, which was mostly lifted by insurers, in particular the Life Insurance Corporation at an YTM of 8.28 per cent. With insurers chasing government securities after booking profits in the equity markets, spreads narrowed. The yield spread between the 91-day T-bill and 10 years was just 52 basis points – indicating an almost flat yield across all maturities. Yields tend to flatten out when there is no demand for credit assets.

The retreat in nominal yields had little impact on the one-year real yield that remained high at 4.05 per cent, on the basis of the current inflation rate of 3.65 per cent. Investment deposit ratios continue to remain high. Since the beginning of this year ID ratio has been 52 per cent. For the corresponding period of the last financial year it was 19 per cent.

But yields are unlikely to show any hardening trend in the next few months, bankers said. Credit offtake remained low. Credit-deposit ratio since the beginning of this year was just about 49 per cent. But bankers prepared to redeem some corporate bulk deposits. This was expected to improve the CD ratios.