Govt bond market losing depth as trade volume falls from May high

Written by fe Bureau | Mumbai | Updated: Jan 3 2014, 09:52am hrs
The government bond market is losing its depth as trade volume, both on an aggregate basis and the number of bonds traded daily, has been dwindling over the last six months.

Average weekly turnover stood at around R1.5 lakh crore in December, the lowest in three months. The turnover has fallen from a high of R7.93 lakh crore in May, data from the Reserve Bank of India showed.

Not only has the overall turnover fallen, but the number of bonds being traded is also abysmally low. Most traders are sticking to only a select few bonds for trading, with the 10-year benchmark being one of the papers.

On Thursday, only four bonds chalked up 90% of the R20,450-crore trade volume on the NDS-OM trading platform of the Clearing Corp of India (CCIL). These were the 10-year benchmark 8.83%, 2023, the 7.28%, 2019 bond, the 8.28%, 2027 bond and the 8.12%, 2020 bond.

Data from the CCIL showed that on an average not more than five bonds have raked up the volume on NDS-OM over the last six months.

The big hit on bond portfolios of all investors due to the near 200 basis points jump in bond yields during May-August has hit market sentiment, dealers said.

Yield on most bonds had risen due to RBIs rate hikes and liquidity measures along with incessant selling by foreign investors.

The hawkish stance of RBI and the lack of OMOs have been the factors. Another factor is FIIs have been sold out, so that source of demand has gone away, said Manish Wadhawan, head of rates at HSBC Bank.

In July, the RBI had hiked the marginal standing facility rate by a whopping 300 bps to 10.25% and also capped banks borrowings through the more cheaper repo tender at 0.5% of deposits. Between May and August, foreign investors have sold $12 billion worth of bonds.

Bond dealers said that as demand from foreign investors has dwindled and the central bank is unlikely to buy bonds under open market operations, volume in the bond market may not pick up even in the current quarter.

I doubt if volumes will pick up. We may see some rise in the next financial year only, said NS Venkatesh, head of treasury at IDBI Bank.

Uncertainty due to the upcoming general elections will also play on investors minds, dealers said.

A big trigger for the bond market is the yearly market borrowing programme of the government announced in the Union Budget every year. However, in an election year such as the current one, the current government puts its financials as a vote on account instead of a full-fledged budget. This is an election year, so there would be a lot of uncertainty around the government market borrowing. So traders would sit tight and there would not be big trading positions, said the head of a primary dealership.