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ShareThe market is eagerly anticipating the extent of hike in the held-to-maturity (HTM) portfolio of banks.
The Reserve Bank of India (RBI) had indicated that they are evaluating proposals for a hike in HTM category from current levels of 25% of net demand and time liabilities (NDTL). The market is expecting at least a 2% hike in HTM and a mid-year transfer of securities to HTM portfolio from mark-to-market portfolio. A 2% hike in HTM would mean banks have an additional room of Rs 80,000 crore to absorb government bonds into their books. A mid-year transfer of securities from mark-to-market portfolio to HTM portfolio will enable banks to escape higher provisioning if yields rise further.
The HTM news is largely discounted at current levels of yields and if the RBI disappoints, the market will react negatively.
The borrowing calendar for the second half is scheduled to be announced this week. The government has indicated that supply would be around Rs 10,000 crore a week for the next three months.
This would largely complete the full-year borrowing programme by January 2010. The states will also increase supply in the coming months, adding to the government bond supply. The market will have to live with a packed auction calendar for the next three months, though it will be less that what it saw in the first half of 2009-10. The government borrowed Rs 3 lakh crore in the first six months of the year, or around Rs 12,500 crore a week.
The RBI is also seen as sending conflicting signals to the market on withdrawal of the accommodative policy. The central bank has sounded hawkish in recent speaks, but it has not given a clear signal on the timing of the withdrawal.
The market has been grappling with the huge government bond supply coupled with uncertainty on the timing of withdrawal of accommodative policy, leading to high volatility in bond yields.
Inflation as measured by the wholesale price index (WPI) came in at positive 0.37% for the week ended September 12, 2009, against expectations of 0.29%. Inflation is trending up on the back of a sustained rise in primary article inflation.
Liquidity, as measured by bids for reverse repo/ repo in the liquidity adjustment facility (LAF) auction of the RBI remained high, with bids for reverse repo at Rs 1 lakh crore. Overnight rates were at 3% levels. Liquidity will continue to be high in the system, keeping overnight rates low.
Government bonds
Government bonds saw yields move up week-on-week as traders offloaded positions ahead of a holiday-shortened week. The 10-year benchmark bond -- the 6.90% 2019 security -- saw yields move up by 8 basis points (bps) to close the week at 7.16% levels.
The five-year benchmark bond, the 6.07% 2014 bond, saw yields move up by 7 bps to close at 7.10% levels. The 7.94% 2021 bond saw yields close up 5 bps at 7.73% levels, while the long bond -- the 8.24% 2027 security -- saw yields close up 5 bps at 8.13% levels.
The government auctioned Rs 12,000 crore of bonds last week. The bonds auctioned were the 6.49% 2015 bond for Rs 6,000 crore, the 6.35% 2020 bond for Rs 4,000 crore and the 8.28% 2032 bond for Rs 2,000 crore. The cut-offs came in at 7.12%, 7.53% and 8.19% respectively.
The RBI purchased Rs 1,969 crore of bonds in open market operations last week. The bonds purchased were the 7.56% 2014 bond for Rs 400 crore and the 7.94% 2021 bond for Rs 1,569 crore. The cut-offs were 7.03% and 7.65%, respectively.
Treasury bills, corporate bonds and overnight index swaps
Treasury bill (T-bill) yields were flat in the 91-day T-bill auction held last week with the cut-off on the 91-day T-bill auction held on September 23 coming in at 3.40%, against a similar cut-off seen in the previous auction. The 364-day T-bill auction saw the cut-off coming in at 4.33%, as against a cut-off of 4.60% in the previous auction. The RBI is auctioning Rs 2,000 crore of 91-day T-bills and Rs 1,000 crore of 182-day T-bills this week.
Corporate bond yields were flat week-on-week. Five-year benchmark bonds traded at 8.45% levels, while 10-year benchmark bonds traded at 8.83% levels. Five-year spreads closed lower by 4 bps at 122bps levels while 10-year spreads closed at 151bps levels, down 7 bps week-on-week. Corporate bond yields could see a mild rally this week on the back of liquidity pressures easing in beginning of October.
Overnight index swaps (OIS) saw the curve move down week-on-week. The five-year OIS yield closed lower by 5 bps at 6.58% levels while the one year OIS yield closed lower by 16 bps at 4.69% levels. The one-over-five spread closed up 12 bps at 190 bps levels. OIS yields are likely to remain ranged on the back of positive global cues and weak domestic cues.
Disclaimer: The author is head--fixed income, IDFC Mutual Fund. Views are personal
