Volatility marred Oct-Dec qtr

Fears of excess supply of government debt papers kept markets on tenterhooks.

Yields on government bonds plummeted from three-year highs to three-month low levels in the October-December period, making it the most volatile quarter in 18 months. Shocks of higher government borrowing hit the market twice in the third quarter, leading to high volatility in the otherwise steady Indian debt market.

The debt market ride was no less than a roller coaster one. The government had announced Rs 52,872 crore of extra market borrowings for the current financial year in the last day of the second quarter. Reacting to the announcement, yields jumped by nine basis points on the first trading day of the third quarter and hardened till these hit levels close to the nine per cent mark in November. Liquidity easing measures by the Reserve Bank of India (RBI) helped yields cool to 8.30 per cent levels in about a month. However, talks of another round of upward revision in market borrowings saw yields declining by 10 basis points in the last four days of the quarter.

The government on Friday said it would borrow Rs 40,000 crore more, raising the total market borrowing plan to Rs 5.1 lakh crore for 2011-12. Yields on the 10-year benchmark government bond closed at 8.57 per cent at the end of the third quarter, compared with 8.43 per cent at the close of the previous quarter. Bond yields fluctuated by 65 basis points in the October-December period.

“This was a challenging quarter for bond dealers, and it depends on how one played through the levels,” said N S Venkatesh, head of treasury, IDBI Bank. However, the strain due to mark-to-market losses this quarter may not be much, since the market provided a window to exit on time, he added.

Fears of excess supply of government debt papers kept markets on tenterhooks, even as other factors like inflation and the monetary policy stance worked in the favour of the yields. While food inflation eased to a six-year low of 0.42 per cent, the central bank raised the policy rate by 25 basis points in the October-December period.

Going forward, markets expect more than just open market operations from the Reserve Bank of India. The central bank matched almost all bond purchase auctions with bond sale auctions after the first round of revision in the market borrowing plan. “For how long can the central bank continue doing so? More steps may be needed to help banks support excess supply of government securities in the fourth quarter,” said T S Srinivasan, general manager (treasury), Indian Overseas Bank.

Yield projections went haywire, as the government failed to stick to its borrowing target. “I was bullish on bond prices, but not any more. Yields may rise, but it is difficult to put a level,” said a treasury head of a large public sector bank. Bond yields and their prices move in opposite directions.

In the current economic environment, preference for debt investments over weak equity markets may be the only respite. “Any spurt in bond yields would be a good buying level. This may help limit the rise in yields,” said Srinivasan.

According to the revised issuance calendar, the central bank would auction Rs 12,000-14,000 crore every week in the January-March period. The government has already borrowed Rs 3.82 lakh crore so far this financial year.