Cautious traders crash bond, IRF volumes

Trading volume in bond markets, at an average of about Rs 30,000 cr now, is only about 60% of the usual volume

Traders are moving cautiously in the bond market and are not in a mood to trade, as is evident from the crashing volume of bonds.

Trading volume in bond markets, at an average of about Rs 30,000 crore last month, is only about 60 per cent of the usual volume as bond traders anticipate that all the positive news that could have come their way have been priced in already.

As a result, trades in the subsidiary instruments have also fallen sharply. Volumes on interest rate futures (IRF), the instrument used by traders to hedge their fixed income securities, crashed to Rs 25,239 crore in the entire month of October, from Rs 46,000 crore in January.

In this context, any effort by the Reserve Bank of India (RBI) to popularise the IRF market would have tepid response. The central bank last week allowed IRFs on money market instruments, apart from the already allowed IRFs on dated securities.

Volumes in the bond market itself have crashed because of a number of factors. Liquidity until recently was tight; banks also do not want to invest in bonds much as they will have to keep enough liquidity to meet the FCNR (B) deposit maturity. US yields have also started inching up and crude oil prices have moved up.

“Even in this background, supply of bonds has not thinned and therefore the reluctance to trade,” said Devendra Dash, senior bond trader at DCB Bank Ltd.

Traders are also keeping their powder dry because of the ongoing tension at the international borders of India and Pakistan.

“There is an uncertainty over the Indo-Pak affairs. Everybody is hedged and sitting pretty realising it is not a good time to trade,” said a treasury head of a private bank who did not wish to be named.

The yield on the 10-year bond is still below the seven per cent-level and could rise in the coming days as the US is poised to raise rates in the next few months. As yields rise, prices of bonds fall.

According to Dash, instruments like IRF etc. will see volume only when the volumes in the bond market improves, which, he says, is not going to happen for some time to come.