The Hindu Business Line : Bonds soften further on foreign capital inflows

Bangalore, Dec 30 Bonds continued their softening trend propelled by foreign capital inflows and demand from insurance companies ahead of the year-end.

Bankers said that firm oil prices, currently upwards of $95 a barrel, had little impact on bonds. Instead prices of up to $100 a barrel have already been discounted by the financial markets. “We have already seen those highs. Oil prices will impact yields only if the prices hit new highs,” a trader said.

CBLO volumes rise

But traders said that oil companies were active in the markets ahead of the year-end, raising resources. Most of them though raised the resources through the Collateralised Borrowing and Lending Obligations market, using the oil bonds placed with them by the Government as collateral.

In fact, CBLO volumes have been on the rise, in view of the oil companies’ recourse to the CBLO. CBLO trade volumes are currently about Rs 32,000 crore per day.

However, inflows from non-resident Indian investors and inward remittances overwhelmed oil demand. As a result, the rupee remained firm against the dollar. The rupee firmed to Rs 39.43 last weekend.

Forward premia up to one month, though hardened to 2.4 per cent, in view of large arbitrage flows. The arbitrage flows were mainly driven by foreign banks attempting to take advantage of the tight liquidity on account of advance tax payments.

Call money rates are currently close to the RBI ceiling of 7.75 per cent. The tight liquidity situation ahead of the year-end was evident from the large recourse to the RBI’s Repurchase window at the weekend Liquidity Adjustment Facility Auction. At the auctions, there were 24 bids for Rs 33,865 crore.

Yet, the tight liquidity did not manifest in the weekly Treasury Bill auctions. At the 91- day T-Bill auction, the cut-off yield remained at 7.35 per cent, unchanged from the previous week.

However, the weighted yield dropped to 7.31 per cent. Though the notified amount was only Rs 500 crore, in view of the anticipated liquidity tightness, competitive bids amounted to over Rs 2,500 crore and non-competitive bids were Rs 950 crore.

The RBI retained Rs 1,450 crore. At the 182-day T-bill auction also, the cut-off yield was 7.60 per cent and the competitive bids were more than four times the notified amount of Rs 500 crore. Only the notified amount though was accepted.

Besides, the 10-year weighted yield-to-maturity, softened to 7.85 per cent, down two basis points from the previous week’s level of 7.87 per cent, clearly discounting the possibility of any sustained liquidity tightening.

Undertone firm

The undertone in the markets remained firm, despite the political instability in Pakistan after the assassination Ms Benazir Bhutto. Daily trade volume remained low at about Rs 4,200 crore. But yield spreads remained narrow. The yield spread between 91-day Treasury bill and 10-year YTM was 50 basis points. The inter-yield spread between one-year and 29 years was only about 45 basis points.

Bankers said the narrow spread was partly on account of the rush by foreign banks and insurance companies into long-term securities in anticipation of the RBI’s easing of liquidity. Many foreign banks that swapped their dollars parked in long-term Government securities. The chase for long term securities pushed down the yields of some securities above 10 years. The securities preferred included the 11.60 per cent 2020 per cent at an YTM of 8.04 per cent, about five basis points more than the benchmark 13-year security of 6.35 per cent.

Besides, insurers also chased long-term securities. Among the preferred securities were the 8.33 per cent 2036 at an YTM of 8.22 per cent. In fact, many of the life insurers have quietly exited from the equity markets and preferred to wait for the FIIs to begin selling again. Traders said that insurers have preferred to park their profits from equities trading in the long-term securities to maximise investment returns.

The fall in nominal yields has begun reflecting in the one-year real yields. One-year real yield dropped below 4 per cent to 3.95 per cent for the first time in almost 8 weeks. Besides, bankers said, the fall in real yield was largely due to demand for Government papers due to slack credit offtake. Investment deposit ratio remained above 52 per cent so far this financial year and credit deposit ratio below 50 per cent.

The average maturity of investments is about one year for private sector banks and 3 years for public sector banks. And if the weak credit offtake continued, the next option would be to raise the average maturity of investments. Treasury departments are now being cranked for driving profits.