Banks stare at MTM losses as bond yields surge

Selling pressure from mutual funds has also aided surge in returns

Banks are staring at huge mark-to-market (MTM) losses on their government bond portfolio in the fourth quarter, as yields on most liquid papers have moved up following the Reserve bank of India’s (RBI’s) hawkish tone in the mid-quarter review of its monetary policy.

Selling pressure from mutual funds and private and foreign banks has also contributed to the rise in yields. Most banks had booked profit during the third quarter of the current financial year.

According to dealers, banks had been investing heavily in government papers when the yields were heading southwards before the RBI policy review. The yield on the 10-year benchmark paper had fallen to 7.80 per cent in the last week of February, in anticipation of a monetary policy stance that would signal a substantial rate cut next financial year.

The 10-year yield closed at 7.99 per cent on Tuesday. The bond market is closed today on account of Holi and tomorrow is the last trading day of this financial year. The yield on the 10-year benchmark stood at 8.05 per cent on December 31 and was expected to fall by at least 30 basis points by the end of the financial year.

The yield on the 10-year benchmark government bond has moved up 11 basis points since the mid-quarter review on March 19, while yields on another most-traded bond, with a coupon rate of 8.33 per cent and maturing in 2026, moved up 9 basis points. Though RBI had reduced the policy rate in its mid-quarter review, it had said a headroom for further monetary easing was limited.

“Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited,” RBI had said in its guidance, citing risks in the light of an increasing wedge between retail and wholesale inflation adversely affecting inflation expectations, besides high current account deficit,” RBI had said.

Some treasury officials of public-sector banks said selling pressure from mutual funds had been evident over the past couple of weeks on the back of a fall in the one-year certificate of deposit (CD) rates. “Apart from mutual fund redemption pressure, many players shifted to CDs from gilts, as one-year CD rates eased 50-70 basis points in a fortnight,” said the head of treasury of a public-sector bank.

Most banks invest 80 per cent of their investment portfolio in government bonds. The losses are likely to be more for public-sector banks because most of those have about 30 per cent of their government bond holdings in the available-for-sale or trading portfolio.

“In February and March, most banks had bought long-term bonds like the 10-year benchmark 8.15 per cent 2022 with the expectation that yields would drop. They had particularly anticipated that the yield on the 10-year benchmark would fall and touch 7.70-7.75 per cent by the end of the financial year. But the yield rose and is currently at 7.99 per cent,” said a dealer of government bonds.