Gilt yields soar, forward premiums on the slide

RECAP

Premiums on forward dollars crashed while bonds rallied in the longer end last week following cancellation of the borrowing programme scheduled in April.

Bond dealers went on a buying spree after the expenditure secretary's announcements on the cancellation of the government borrowing programme in April and possibly in May.

The bond market was jubilant when D Swarup, expenditure secretary, said the scheduled bond auction in May might get cancelled if the government had enough surplus cash.

Buying demand in bonds on the back of ample liquidity in the banking system led to gilt prices going up by 25-40 paise in the long end in most trading sessions.

The ten year benchmark 7.37 per cent 2014 closed at a yield of 5.07 per cent and dealers said it will soon breach 5.05 per cent if the buying spree continues. Bond dealers took comfort with the existing liquidity in the market. The banking system is having over Rs 90,000 crore lying with the RBI in repos.

The market started with a bearish undertone as inflation rate announced by the government figured at 4.40 per cent. Economic advisor Ashok Lahiri assured that the government aims to keep the inflation rate below 5 per cent.

While banks and mutual funds have been active in the long ended securities, foreign institutional investors have been doing brisk trading in treasury bills to take advantage of the interest rate spreads.

Although trading has been active, the sentiment in the market is a bit cautious on two accounts. Firstly, the inflation rate, which the market was expecting to be around 4.3 per cent came up higher at 4.4 per cent. Therefore despite the base effect, prices are firming up and it is showing in the inflation data.

Secondly, treasury yields in the United States have been firming up with good job data. In the forex market, with the spot rate stabilising around 43.80/85 levels, exporters stopped getting panicky.

Importers seized the opportunity (of falling premiums) to cover their future payments with dollars which they are getting cheaper in the forward market compared to the spot. The spot rupee opened at 43.9702, but closed the week at 43.87 on the back of dollar supplies.

The week started with the exporters panicking as the rupee gained against the dollar. Therefore, at every possible support from the Reserve Bank and the consequent weakening of the rupee, exporters booked their receivables and received premiums.

This led to forward premiums going into a discount across maturities. Frantic dollar buying by banks, owing to acute dollar shortage in the foreign exchange market, led the spot dollar to reach a low of 44.01 per cent during the week, This forced forward dollars across maturities to turn into discount, with cash dollars available at a premium of 7 per cent, only to be sold back tom.

With pressure of importer covering and exporters cancelling their earlier contracts, forward dollars recovered a bit from Thursday's levels with one-year forward dollars coming back into premium during the day.

However, towards the later part of the week, forward dollars of all maturities slipped to a discount. Six month and one year forward premiums closed at -0.15 per cent and -0.05 per cent as against 0.06 per cent and 0.03 per cent, respectively, on Thursday.