bond yields: Bond yields spike as traders keep off, MFs sell to meet redemption

Money markets friction worsened, with yields spiking in thin volumes and even trading in government bonds collapsing as many traders stayed home and some mutual funds sold to meet redemption pressures which worsened the situation.

The thin trading and unusual spike also forced the Reserve Bank of India to act yet again to advance the repo auction scheduled for March 30, to Thursday.

For the first time since the 2005 Mumbai floods delayed the arrival at the desk of the then high priest of Indian bond markets – the head of State Bank of India’s treasury – there was no trade for more than half an hour on Tuesday even after the opening bell.

Traded volumes in government securities fell to Rs 10,738 crore, the lowest since 2017 and down from an average of more than Rs 50,000 crore seen in normal times, data from Clearing Corporation of India showed.

“Trading government securities is the last thing on peoples mind,’’ said Naveen Singh, senior vice president at ICICI Securities Primary Dealership. “The focus was on just doing the bare minimum and ensuring no default on counterparties.’’ The benchmark bond yields dropped eight basis points to close at 6.30% on Tuesday after RBI advanced variable repo auction of Rs 25,000 crore to March 26 instead of penultimate day of the financial year.

Rates on corporate bonds, even that of best rated names like HDFC, surged amid thin volumes. Three year HDFC bonds were quoting at 8.70% up from 8.40% on Friday while five year bonds were quoting at 8.50% versus 8.22% on Friday. Short term yields on the three month to six month commercial papers crossed 9% in some cases as mutual funds were forced to sell their short tenure investment in the face of redemption pressure.

This is partly induced by the absence of traders and a kind of dislocation that is happening in financial markets across the world where investors are rushing to be liquid rather than being invested.

Unlike many other businesses government bond traders cannot work from home because of the risks associated with failed trades.

“If there is a connectivity issue or trades fail then there is no clarity on how trades will be settled so many firms don’t allow trading from home,’’ said Dhawal Dalal, head fixed income at Edelweiss Mutual Fund. “Yields fell today as there was some respite from FPI sales and also a SEBI has allowed mutual funds to borrow from banks to tide over year end redemption pressures,”

The interbank call money market continued to witness squeeze with the overnight rate surging to a peak of 5.60% during the day.

The weighted average rate was at 5.46%. The spread between the repo, the rate at which the RBI lends to banks, and the call rate – a key barometer of the calmness in the financial markets — rose to as high as 45 basis points on Tuesday versus 35 basis points a day earlier.

A basis point is 0.01percentage point. The current call market behaviour is in sharp contrast to October last year when banks lent to each other at rates lower than the repo rates. The spread or differential between repo and the overnight call was at 46 basis points on the lower side, which means call rate was less than the repo rate.