Bond market shrugs off global terror scare

MUMBAI: Bond markets shrugged off a terror scare, which spooked markets worldwide with sentiments here being boosted by Life Insurance Corporation’s (LIC) large purchase in Tuesday‘s bond auction.

Market sources estimate that the total size of the bid placed by LIC could have been around Rs 1,000 crore. Another positive sign for bonds was US Fed decision on interest rates on Tuesday, which raised the possibility of interest rates declining here.

Ajay Mahajan, group president, financial markets & financial institutions, Yes Bank, said, “The August FOMC decision to pause after 17 successive hikes is a very important factor for bond markets going forward.

Unless data releases suggest otherwise, we may be very close to the end of the tightening cycle in the US. Naturally, the domestic market has reacted positively to Fed’s decision. We expect this market to gain further strength this quarter and will not be surprised if 10-year treasuries trade below 8%.”

According to a senior public sector bank official, RBI’s decision to lower the maturity of securities being auctioned caused insurance companies to book fresh positions in the two government stocks that were auctioned this week. He pointed out that insurers need these securities to match their long-term liabilities.

In its issuance calendar for bond auctions, RBI had said it would sell two bonds worth Rs 9,000 crore in the first week of August. One of these bonds was to have a maturity of between 5-9 years and the other was to have maturity over 20 years.

However, after an auction of long-dated paper remained unsubscribed in July, RBI lowered the maturity of bonds auctioned in the subsequent August auction issue.

As against its original plan, RBI decided to auction the 10-year benchmark government bond — 7.59% 1969 — for Rs 3,000 crore and issued a five-year paper — the 9.39% ’11 bond for Rs 6,000 crore.

The lower maturity was coupled with huge bids by LIC, which resulted in cut-off prices below market expectation. SR Kamath, general manager, STCI, said that typically securities with a five-year maturity period are viewed as a means to correct asset-liability mismatches.

As such, the RBI has been extremely wary of issuing longer-term securities due to uncertain interest rates and bonds being priced higher with lower yield structures, a treasury manager with a private sector bank added.

The yield of the benchmark 10-year bond ended at 8.08%, a level last seen on June 22, from an intra-day high of 8.13%. It closed at 8.12% on Wednesday.