Morgan Stanley, Goldman Sachs keen on entering debt market
With interest rate situation stabilising and given that rates may soften going forward, business of setting up bond houses has attracted a lot of attention. Heard on street
By Preeti R Iyer, TNN |
MUMBAI: Is this the onset of a boom in the bond market? Leading brokerage houses and investment banks are now eyeing the debt market, turning away from the equity space.
With the interest rate situation stabilising in the country and given that rates may soften going forward, the business of setting up bond houses has attracted immense attention from entities primarily active in equities.
Among players keen on having a presence in the debt market are Morgan Stanley, Goldman Sachs, Edelweiss and a few other banks. Some of the players have applied to the Reserve Bank of India (RBI) for licences to open bond houses.
With the interest rate situation stabilising in the country and given that rates may soften going forward, the business of setting up bond houses has attracted immense attention from entities primarily active in equities.
Among players keen on having a presence in the debt market are Morgan Stanley, Goldman Sachs, Edelweiss and a few other banks. Some of the players have applied to the Reserve Bank of India (RBI) for licences to open bond houses.
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Sources said even the A V Birla group is looking at setting up a primary dealership firm independently. The A V Birla group has joint ventures with Sun Life in areas such as asset management and insurance. Edelweiss Capital, which recently came out with a public issue, has presence in fields such as wealth management, institutional broking, investment banking and asset management.
“Entering the fixed-income segment would help Edelweiss gain access to the bond market and would make good business sense. It would complete the circle as far as offering financial services are concerned. The company is yet to approach the central bank formally for a bond house licence,” a source close to the development said.
According to a senior official with a leading bond house, some banks have also approached RBI with the intent to either roll out a separate treasury department within the bank or roll it out as a separate subsidiary. These include both multinational banks and public sector players. Typically, bond houses make profits in a falling yield scenario. Bond yields fall when prices rise. This helps traders book profits when they sell their bond holdings.
In the current backdrop, bond traders feel that yields may see a downward movement in times to come, given the amount of surplus cash floating in the banking system. In fact, since March 2007, bond yields have softened nearly 50 basis points. The yield on the benchmark paper, currently the 7.99% bond maturing in 2017, has fallen from over 8% in March 2007 to 7.48% in February 2008.
RBI did leave key interest rates unchanged in its recent policy review. However, given that the US Federal Reserve and, more recently, the Bank of England have announced rate cuts, market participants feel sooner or later, RBI might be forced to follow suit. This could then lead to softer yields in the bond markets.
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It may be recalled that exactly a year ago, several bond houses had run into huge losses due to the rising interest rate scenario. It was during that phase when RBI hiked the cash reserve ratio, the percentage of deposits that banks need to park with RBI in the form of cash, thrice in a span of three months. Several banks had, in fact, decided to merge their primary dealership arms with their treasury departments in a bid to cut down operational costs.Treasury managers are of the opinion that primary dealership firms need to be more nimble-footed, now that they have been allowed to use the when-issued trading platform and short-selling, previously allowed only on an intra-day basis, but now extended to a period of five trading days.
These instruments allow primary dealerships make profits even when rates are on an upward trajectory, the only issue being the fall in prices during auctions, a senior Fimmda official pointed out.
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