MSS gilt buyback may see tepid response on low trading gains

The Reserve Bank of India’s (RBI) repurchase auctions of two gilts under the market stabilisation scheme (MSS) for a total of Rs 10,000 crore is likely to receive a tepid response from banks, bond traders said. Banks will not have much profit margin on selling the bonds that will be bought back by RBI on Thursday, dealers said.

RBI has offered to repurchase Rs 5,000 crore of 5.48 per cent, 2009 gilt and 6.65 per cent, 2009 gilt each on Thursday, a day ahead of the Rs 10,000-crore gilt auction under the government’s market borrowing programme. These two MSS bonds have very less residual maturity and therefore, the scope of booking comfortable profit margin is less, the dealers said.

“Most banks would choose to hold them till maturity next year,” a bond dealer said.

Gains seen low

Many treasury officials said there is little to gain if they participate in the repurchase auctions. Most state-owned banks had bought these MSS gilts in their Hold-To-Maturity portfolio. “My holding cost has removed most of the profits on these bonds when I had bought them. There is not much to gain if I sell my bonds now at the auction,” said a senior treasury official at a state-owned bank.

Banks will also be reluctant to sell short tenure securities, especially the two bonds offered for repurchase at the auctions, because the yields are likely to fall more.

“The interest rate cycle has turned and RBI’s policy is accommodative. So, it makes more sense in either buying long-term papers or holding the short-term papers till maturity,” said a dealer at a private bank.

With RBI’s intent to keep liquidity sufficient and expected big supply at the longer end of the yield curve, most banks will be keen to hold short tenures in their portfolios. The supply in the short tenure maturities is limited as the government is seen borrowing through gilts that have more than five-year maturity.

“There are plenty of opportunities to invest in longer maturities as the government will likely overshoot their borrowing programme. They have cut SLR also, so to that extent the longer end will have pressure,” said Nirav Dalal, country head and executive vice-president, debt capital markets at YES Bank.

Bidding trouble

Many state-owned banks may bid at very aggressive levels in the first round of MSS bond buyback auction. “Many will want to bid at around 6.10-6.15 per cent level,” said a foreign bank dealer. Currently the 5.48 per cent, 2009 paper is trading at Rs 99.05 or 7.10 per cent and 6.65 per cent, 2009 is at Rs 99.85 or 7.03 per cent.

The 6.65 per cent paper was last sold in July 2007 at Rs 99.30 or 7.08 per cent while the 5.48 per cent paper was last sold in September 2007 at Rs 96.36 or 7.79 per cent. “You could see bids at above Rs 100-levels. But RBI could reject bids if the levels are unacceptable,” said S Ananthanarayan, senior vice-president of treasury at Kotak Mahindra Bank.