Psu Banks Rush For Long Papers

Public sector banks are buying long-dated securities in the secondary debt market in a big way to reap arbitrage benefits.

The Reserve Bank on Thursday announced the Rs 1,000-crore auction of 10-year paper and banks are picking up the dated securities, thereby speculating on the cut-off rate at the auction. In case the rate is lower than the prevailing rate of the 10-year paper, the banks stand to make an instant gain.

The growing interest in long-dated securities by public sector banks is a clear indication of a liquidity overhang in the banking sector and banks parking their surplus funds in government papers.

 

In the past few days, active trading has been witnessed in the 14 per cent central government security and the 12.5 per cent gilt maturing in 2004. In fact, most of the primary dealers have put out both the securities on the buy and sell list for banks.

This is against the earlier trend when public sector banks preferred to park their funds in short and medium-term securities. A lot of these nationalised banks with good retail outlets for gilts are buying the long-dated paper, a dealer said.

The SBI, which is a major player in the market, is selling off its long-dated papers in the debt market.TheSBI is entering the market with lots of Rs 25 crore to Rs 30 crore and selling these to other nationalised banks. And once these lots are sold off, the yields on the securities come down, one dealer said. Banks are making a beeline for long-term securities primarily becau-se they expect the government to come up with a long-dated paper soon. Arbit-rage chances in the long-dated securities are aplenty, especially with the announcing the auction of a Rs 1,000 crore ten-year paper, a treasury head said

At present, the 14 per cent gilt maturing in 2005 is being transacted at a yield of 13.56 per cent.

The apex bank is likely to fix the cut-off yield of the latest ten-year paper at a higher yield of 13.65 to 13.70 per cent. If this happens, the banks can make a decent spread in the long-dated papers.

The much-awaited auction was announced despite the government completing its borrowing programme for the fiscal year. Dealers said the RBI has announced the sale the 10-year paper sensing the easy liquidity conditions.

Analysts said the government is expected to mop up around Rs 5,000 crore more from the market to fund the oil pool deficit. In fact, banks investment in the government securities has increased by over Rs 2,677 crore during the fortnight ended January 17.