Gilt-Edged Somersault: Yields Take Off As 12.59% Paper Goes On

In a total reversal of the trend on Monday, the secondary market yields of long-term government securities shot up substantially after the Government of India decided to sell the 12.59 per cent 2007 paper on tap from June 25.

The decision of the government to borrow at higher interest rates has foxed the market, when yields were falling. That apart many players who purchased securities yesterday have incurred a capital loss due to the fall in prices.

With additional fresh paper available, there was significant realignment in the yields in the secondary market. For instance - the yield of the 12.59 per cent 2004 went up from 12.30 per cent on Monday to 12.53 per cent yesterday.

 

Among the other securities whose yields have shot up include the 13.05 per cent 2007 which has moved up from 12.50 per cent to 12.63 per cent. There was some initial panic selling in the market but there was a partial recovery later in the day .

The decision to sell the seven year paper on tap basis forms part of the additional borrowing of the central government. It might be recalled that the issue of Rs 2000 crore seven year paper earlier last week had been oversubscribed by around 2.7 times. There is an hypothesis the RBI must have decided to take advantage of this situation and advised the government to opt for this route and raise additional resources when the going is good. State Bank of India which could not participate in the latest auction on account of the officers strike will reportedly head the pack of buyers to the RBI window.

Till Monday, the increased liquidity in the banking system had led to yields on government securities crashing across the board. Consequently, all the securities issued in the current financial year were quoting at a premium of Rs 1.40 to Rs 3.

In a meeting with RBI officials yesterday bankers expressed displeasure over the central government's move to opt for this route. The apex bank can however close purchases through this route at its discretion .

The reason behind banks chasing government securities is not far to seek.

While the aggregate deposits of the banking system has increased by Rs 10,521 crore in the current financial year, the corresponding increase in bank credit has been only to the tune of Rs 2,011 crore. So the banks have flocked to the secondary market and the yields had crashed and now the latest move by the government appears to caught many banks napping who had built up substantial trading positions.