By Christina Titus | Mahesh Nayak
Corporates and banks have pressed the sell button on government securities (G-Secs) after the Reserve Bank of India’s (RBI) monetary policy committee (MPC) surprised the bond market with an unexpected 50 basis points (bps) cut in the repo rate to 5.50% and a change in monetary policy stance to neutral.
According to market sources, a leading corporate sold G-Secs of Rs 20,000 crore on the policy day across tenures. Many other corporate and bank treasuries have followed the same strategy to book profits. The top two liquid papers that were sold are the 6.33% 2035 G-Sec and the old benchmark 6.79% 2034 G-Sec.
A head of treasury from a domestic bank, speaking on condition of anonymity, said: “We have been selling the benchmark in both our trading and held-to-maturity (HTM) book since the policy day. We have sold the 10-year G-Sec between 6.18% and 6.28% levels.”
Apart from the trading book, which typically constitutes 10-12% of the total portfolio, banks are allowed to sell 5% of their HTM book.
He added that they have been selling as they don’t see the benchmark touching 6% anytime soon. Since the MPC announcement, the 6.33% 2035 G-Sec, after touching a low of 6.10% on June 6, has moved higher on profit-taking to close at a high of 6.31% on June 11.
A bond dealer at a private sector bank said: “The selling is more to protect the portfolio rather than making trading gains.”
Another head of treasury with a domestic bank, which sold the benchmark paper at 6.20% levels on the policy day, agreed, stating that they took the short position even before the policy as they had to protect their profits. “We had expected the terminal rate to be around 5.50%, but were surprised with the 50 bps cut coming in one go instead of it being spread across two-to-three policies.”
In addition, the change in stance as well as the commentary from the governor has made the market believe that the terminal rate will be 5.50% in the near term instead of 5.25% or 5% in the coming months.
Market participants expect the sell-off to continue, including banks, institutions and foreign institutional investors (FIIs), which could push the 10-year G-Sec yield higher to 6.35-6.40% in the near term. A treasury head said, “As we are short in the market, we will wait and watch for the yields to settle and be a buyer around 6.35%.” Some may even start earlier that post 6.32% levels.
While banks were sellers in the 10-year paper, they shifted their strategy and started repositioning their portfolios. A treasury head of a private sector bank said: “With a good carry along with less risk of price volatility, banks are buyers in the two to three-year paper.”