Bond yields up on higher govt borrowing

Bond yields moved up sharply as the government announced plans to borrow another Rs 46,000 crore by the end of March.

Yields rose as the additional fund-raising was higher than market estimates and there was a lack of clarity on the modalities.

The yield on benchmark government paper (2018) moved up 13 basis points to 6.43 per cent as soon as the additional borrowing programme was announced by economic affairs secretary Ashok Chawla in Delhi.

With no clarity on the borrowing calendar, the yield hardened further to touch 6.48 per cent at close of trading, according to data from the Reserve Bank of India’s negotiated dealing platform.

Investors sold government securities in anticipation of large supplies of bonds in the coming weeks. “There is fear of excessive supply,” said a dealer.

A bond dealer with Canara Bank said that the extra borrowings will put pressure on the yields. The benchmark paper is expected to see yield moving in the 5.5-6.5 per cent range by the end of March, he added.

The yield may not reach the upper limit as in the evening, RBI said that it would ensure that the government’s market borrowings are managed in the least disruptive manner. RBI Governor D Subbarao said RBI will not look at private placement route for additional borrowings.

The central bank could resort to aggressive unwinding of bonds issued under the market stabilisation scheme (MSS). “It will be timed with fresh borrowings to ensure liquidity,” IDBI Gilts Managing Director N Venkatesh said.

If need arises, since there is adequate liquidity in the system at present, RBI could also cut the cash reserve ratio to make more resources available in the system, bankers said. It has already cut CRR by 400 basis points since mid-September 2008, releasing Rs 1,60,000 crore.

An official with State Bank of India said the liquidity would be ample till June 2009 with interest remaining soft.

Apart from the central government borrowings, there will be a flow of treasury bills and state government bonds. State government have been allowed to raise additional resources up to 0.5 per cent of the gross state domestic product. This could keep pressure on the yields, dealers said.

Banks may see rise in SLR bond portfolio
With more supply of securities, banks would increase the size of government bond portfolio in absolute and percentage terms, bankers said. With the economic slowdown impacting almost every segment of the economy, the demand for credit has moderated in recent weeks.

This would encourage banks to park funds in bonds, raising the size of their statutory liquidity ratio (SLR) portfolio, said an executive with a large public sector bank.

“Some banks will have concerns of capital adequacy falling below the comfort level of 12 per cent by March-end. They will prefer to invest funds in zero-risk government bonds than lend money and create risk-weighted asset. The system wide the SLR portfolio could touch 30 per cent mark,” Venkatesh said.

The improved liquidity conditions and extra government borrowing to fund the stimulus package has reversed the trend of drop in banks’ holdings of statutory Liquidity Ratio (SLR) securities.

The SLR holdings rose to 28.9 per cent in early January 2009 from 25.8 per cent in October 2008, according to data from the central bank.