Foreign portfolio investors have unloaded close to $1 billion of bonds in the past five sessions starting March 6, the day on which the yield on the benchmark hit a two-year high of 7.78%. Latest depository data indicates, net investment by FPIs in bonds stand at minus $11 million. In 2017, foreign investors bought a near-record $23 billion worth of debt where as in 2014 they had invested $26.25 billion. Anindya Dasgupta, head of trading at Barclays Bank, said that foreign investors seem to be concerned about the yield trajectory going ahead. “Like domestic bond market participants, FPIs are also worried that when fresh supply of central government securities hit the market beginning April for the government borrowing, yields might go further north. As a result, FPIs seem to be looking to reduce their positions at current levels expecting to do some value buying. Furthermore, the rupee has seen some volatility in recent times and that could have been one of the triggers which started the sell-off. It is also possible that there could have been some re-allocations for some funds or some redemptions,” he said. The dampening FPI interest is also reflected in the fact that they are now willing to pay much less for acquiring investment limits in G-secs compared to earlier auctions. At Tuesday’s auction, the cut-off level came in at 0.31 basis points compared to 2.19 bps in the previous auction.
Similarly, the highest bid also came in much lower at 1.2511 bps compared to 6 bps in the previous auction. However, demand still outpaced the supply as against Rs 10,979 crore of limits that were put up for auction, FPIs put in bids worth Rs 13,071 crore. Ananth Narayan, professor-finance at SPJIMR, pointed out that the net sale by FPI investors in debt is possibly due to some hedge funds booking losses on their government bond positions. “Offshore NDOIS market yields have also come down, and this could be on account of the same traders who unwound long bonds and paid swap positions simultaneously. Hedge funds would have seen steep losses on their GoI bond holdings the past few months. They may have tried to hedge some of the risk through paying NDOIS swaps, but swap rates have not gone up as much as bond yields have,” Ananth Narayan said.
One of the biggest worries of the bond market stems from the fact that public sector banks, which are big players, have chose to reduce their buying as they are staring at huge mark-to-market losses in their treasury books even in the fourth quarter. As a result, when fresh supply of bonds hit the market in April, yields are expected to go up further unless PSU banks commence buying. Bloomberg data indicates PSU banks have net sold over Rs 6,000 crore of bonds on a net basis in the last five sessions.