Floating Rate Bonds Fail To Find Favour Among Pds

Lack of price volatility seen as a roadblock

Floating rate bonds issued by the Centre as part of its borrowing programme are not finding favour with primary dealers (PDs).

According to PDs, bidding for these bonds do not carry any incentives as there is hardly any scope for price volatility given that the interest rate is reset every six months to one year based on the 364-day treasury bill yields.

Thus, PDs find it difficult to offload the papers in the market and in the process they become illiquid. The dealers have eschewed subscribing to these bonds except to the extent it is required to fulfil the bidding commitment.

Thus far the government has issued four floating rate bonds maturing in 2006, 2009, 2017 and 2014. All these bonds have been predominantly subscribed by public banks.

Banks see these bonds as good hedging instruments against interest rate risk and pay well from the capital appreciation point of view.

Some primary dealers feel the bonds are meant to cater to certain segments such as public banks, pension funds, trusts which invest for capital appreciation.

They added that low trading by PDs in floating rate bonds is not of much significance to the Reserve Bank of India (RBI) as long as the bonds get subscribed at reasonable spread which usually happens.

However, the trend assumes significance as the RBI proposes to come out with more floating rate papers in the near future so as to prevent the adverse movements in interest rates.

In fact, a section of dealers feel that the product can be modified to suit their requirements as it offers hedging opportunity if the interest rate scenario changes.

According to them, the reset period can be increased so that there could be some gains by trading in it during the period.

Besides, they say, some exit routes could be worked out like that in the case of fixed rate bonds with put and call options.