What is so special in the IDBI Bank- Birla MF deal?

For the fund house, switch deals sound positive as it has managed to exit some sticky investments with little secondary market liquidity, dealers said.

For the fund house, switch deals sound positive as it has managed to exit some sticky investments with little secondary market liquidity, dealers said.
MUMBAI: State-owned IDBI Bank and Birla Mutual Fund last week did a novel bond swap deal that would help the mutual fund reduce the risk of holding long term illiquid securities and boost the Bank’s portfolio with long term safe assets ahead of its possible privatisation.

The deal worth Rs. 1,740 crore led to IDBI buying bonds with tenors of as high as 28 years and selling equal amount of bonds with tenors of near term maturity liquid benchmark bonds to Birla Sun Life Mutual Fund, said two people familiar with the transaction.

The deal may also indicate that the Bank is bullish on long term interest rates as the Reserve Bank of India and the Government appear committed to curb inflation to 4% or even lower. Interest rates and bond prices move in opposite direction.

“The specific cases of bond sale transactions referred to were carried out to book profit. Fresh purchases were made at market levels considering overall maturity profile, rate of interest, etc,” IDBI Bank said in an email reply confirming the deal.

The choice of securities are based on both the bank’s portfolio position and market factors as well as the likely emerging scenarios. RBI may reduce the policy interest rate by at least a quarter point on April 5 when it reviews monetary policy, the bank said. Birla MF did not reply to the email queries sent by ET.

For instance, the bank bought Rs 525 crore worth of government bonds maturing in 2043 against which it sold a liquid paper series maturing in 2023. On the same day, the fund house also sold Rs 905 worth of another series maturing in 2029 but received an old benchmark series maturing next nine years with huge market float.

Similarly, Birla sold Rs 310 crore worth of a government paper with 28-year residual maturity against which it received bonds maturing in 2027 (8.28% coupon) from IDBI Bank.

“Markets have already factored in a 25 basis points rate cut,” said Hiren Dhakan, associate fund manager, Bonanza Portfolio. “Anything more than that will only trigger further rally in bond prices. Banks are not known for taking too much speculative (interest rate) risks.”

For the fund house, switch deals sound positive as it has managed to exit some sticky investments with little secondary market liquidity, dealers said. Birla is believed to be holding Rs 5,000-6,000 crore outstanding in one of the long dated papers.

With this, the fund house may have also reduced average duration in its bond fund portfolio, the largest in the industry with about Rs 15,500 crore assets under management.
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