Short Paper Gains Currency On Gilt St

Short- and medium-term government securities are becoming as popular as their long-term kin.

The drop in yields of long-tenor gilts has been sharper in recent times, but the trend reversed in March. Money market dealers expect the trend to continue till the credit policy, to be announced on April 29.

For instance, the 10-year yield, which was at 9.17 per cent as on August 31, 2001, fell to 7.38 per cent as on February 28, 2002. The 20-year yield dipped from 9.95 per cent to 7.91 per cent during the same period. But the drop in yield was much lower for the 5-year paper, which was at 7.64 per cent as on August 31 and at 6.77 per cent as on February 28.

 

In March, the 5-year yield dropped further by eight basis points to 6.69 per cent as on March 23. But the 10-year yield stood seven basis points higher at 7.45 per cent compared to its February 28 level, while the 20-year paper's yield increased by 14 basis points to 8.05 per cent.

Money market dealers said the shift to the shorter end in the recent times was due to the fact that yield differential between the short and long ends of the market came down to an unsustainable level.

A dealer with a private sector bank said: "Six months back, the spread between the 5-year and 20-year papers was 225-250 basis points. But it has come down to 125-130 basis points by end-February. With very little chance of the long term yields going down in a massive way, the attention has been shifted to the short end of the market."

Another money market dealer said though there has not been any major sell-off at the longer end of the market, no market participants seemed to be interested in building up position over the 10-year maturity bracket.

A senior dealer with a private bank said the market is divided over whether the Reserve Bank of India (RBI) will announce a cut in the bank rate in its credit policy. He said: "In the absence of a cut in the bank rate, I do not foresee any change in long-term yields. The correction at the short and medium term yield will, however, continue. We expect another 15-20 basis points fall in the 5-year yield in the next one month."