Insurers, cash-rich cos lap up lenders' medium-term bonds

Mumbai: Top Indian lenders, including HDFC Bank, ICICI Bank and Axis Bank, are reportedly selling relatively shorter duration bonds ahead of the monetary policy review next month. Insurers and large corporates, including Reliance Industries, ITC, Infosys and Wipro, are reportedly buying these papers, dealers said.

Data from JM Financial showed daily secondary market volumes nearly quadrupled last week to per cent8,979 crore on November 25 from per cent2,310 crore - a near-term low recorded two weeks ago on November 11.

"Both cash-rich corporates and insurance companies are investing in the medium-term assets as the long-term view on interest rates is not very favourable," said Piyush Wadhwa, head-treasury, IDFC Bank. "Deposit rates are still low, making these investments attractive. In the near term, these instruments are pricing in some rise in rates. Banks are either reducing some positions ahead of the policy or buying longer maturity papers."


The maturities of those papers are in the range of three to seven years with the five-year segment being the most popular.

Reliance Industries bought some of ICICI Bank's infrastructure bonds while ITC bought perpetual securities of State Bank of India (SBI), market sources told ET.

"In a volatile market, the longer end of the curve is perceived to be riskier," said Mihir Vora, CIO at Max Life Insurance. "At the shorter end, there is a risk of RBI liquidity normalisation. This makes the middle segment relatively stable, prompting select investors to buy. Banks are natural holders of those securities which may be yielding mark to market profits for them."

Individual banks and the corporate houses, barring ITC, did not comment.

Corporate bonds changing hands include Rural Electrification Corporation, Power Finance Corporation, National Bank for Agricultural and Rural Development (NABARD), Kotak Prime, LIC Housing Finance and HDFC Ltd.

The differential or spread between triple-A rated corporate bonds and five-year government securities are in the range of 20-30 basis points now compared with 40-50 bps three months ago.

ITC declined to comment on specific treasury operations. "All investment decisions relating to the deployment of surplus liquidity continue to be guided by the tenets of safety, liquidity and returns," said a spokesperson.

The credit policy due next month could give pointers to the rate trajectory.

"In the forthcoming credit policy in December, we may get a clearer picture on interest rate trajectory, but long-term rates will rise much slower than short-term rates," said Ajay Manglunia, managing director - institutional fixed income division at JM Financial. "This has divided investors into two groups taking two different bets meeting their immediate treasury goals."

Due to the central bank's stated liquidity normalisation policy, shorter duration rates up to one-year have risen sharply. The benchmark yield did not move in tandem.

The 364-day Treasury Bill last week yielded 4.13 per cent, 32 basis points higher than they did two months ago, just before the last bi-monthly RBI policy. During the same period, the benchmark bond yield rose 12 basis points to 6.33 per cent.