MTM loss worries prompt banks to rejig bond portfolio

CREDIT POLICY: THE DAY AFTER

Wary of mark-to-market (MTM) losses due to hardening yields on government securities, banks have reduced the average tenor in their bond trading books.

The yields have surged 15 basis points since the announcement of the 50 basis points policy rate hike by the Reserve Bank of India (RBI) on Tuesday. The yield on 10-year benchmark was 8.28 per cent at the close of trading hours on Wednesday. The paper was issued at 7.8 per cent in the first week of April, indicating a 48 basis points increase in yield.

“The higher than expected rate hike and RBI’s policy stance to give inflation the topmost priority has led to hardening yields,” a bond dealer with a domestic brokerage said.

Bankers expect the yields on the 10-year benchmark bond to touch 8.35 per cent in the first quarter of the current financial year.

“We expect the yields to be in the range of 8.25-8.35 per cent in the first quarter,” said Pawan Bajaj, deputy general manager-treasury, Bank of India.

However, India’s largest bank, State Bank of India (SBI), has not reshuffled the portfolio as yet. “We have done our internal assessment which shows that our books will not be affected even if the yields go up to 8.5 per cent. We will take a call if the yields harden further,” said a senior official of SBI.

According to Moses Hardings, head for global markets group at IndusInd Bank, this is a good opportunity for strategic investors to buy the 10-year paper now and hold it for six to eight months. “Only signals of softening inflation may cool the yields,” he said.

As a result, bankers have reduced the average tenor in the available-for-sale (AFS) book. “Banks that have the 10-year or the 11-year paper in the AFS category will be hit this quarter. We have reduced the average tenor in our AFS books and we don’t have 10-year or 11-year paper in it now,” said a senior treasury official of a public sector bank.

Banks are allowed to shuffle their bond portfolio once every year, which is usually done in the first week of April. The book is divided into three parts — available for sale, held to maturity and held for trade. The average tenors in each category may differ from bank-to-bank depending on its strategy.

Also, there are concerns on the liquidity scenario. The government has been borrowing higher than planned through treasury bill auctions. The government auctioned Rs 8,000 crore of 91-day treasury bills and Rs 3,000 crore of 364-day treasury bills on Wednesday against the Rs 5,000 crore and Rs 2,000 crore auctions planned in the borrowing calendar.

The limits on borrowing through the Ways and Means Advances (WMA) are also higher than last year. The RBI has announced auction of 77-day cash management bills on Wednesday.

“Tight liquidity conditions are anticipated in the coming months as the WMA limits are also higher than last year and the weekly government borrowing also continues. Also, only one cash management bill raised so far will redeem in this quarter,” said the official.