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Bond prices are up because of Insurance buying

 

BOND prices rose slightly as insurers made their purchases taking advantage of the high long-term yields.

Traders say among the insurers that made the purchases include LIC.

LIC's purchases are mostly made through switches.

Such switches imply that short-term bonds are sold and long tenure bonds are bought. Besides, some banks and funds also remained buyers on the back low credit demand and swelling deposits.

The purchases pushed up the price of the 10-year benchmark bond, the 8.79 per cent coupon security falling due in 2021, to Rs 99.71 (face value Rs 100) translating to a yield of 8.84 per cent last weekend. Previous weekend the security had ended at 8.96 per cent. Long-term yields for maturities above 10year, were above 9 per cent. The 29-year security, the 8.4 per cent coupon, falling due in 2040 was

priced at Rs 91 that translated into a yield of 9.2 per cent. This was a particular favourite for insurers like LIC, who have long term liabilities.

Quantum's Mutual Funds head of fixed income Arvind Chari said, "The increased limit for foreign institutional investors helped bonds. But the rise in bond prices is still far short of a rally.

Bonds could fall back gain." Last weekend, the overnment had enhanced he limit for FII investment into government se urities by another $5 bilion (Rs 25,000 crore), tak ing the overall limit to $20 billion.

But a fall back in yields is expected beginning next month onwards, in view of the tight liquidity conditions in the financial mar kets. The tight cash condition was evident from bank borrowings from the Reserve bank of India. At the weekend liquidity adjustment facility auctions, where banks borrow overnight cash from the RBI, borrowings amounted to Rs 1.06 lakh crore. In fact, most of last week, borrowing stayed above Rs 1 lakh crore. Borrowings, from RBI, or the Repurchase window is done against collateral of government securities.

Risk aversion remained a dominant element in financial markets. The mounting risk aversion, stemming from the worsening soveriegn debt crisis in Europe, triggered a flow into U S government securities. The ten-year US treasury yield has dropped 33 basis points from the beginning of November.

Besides, European yields are also becoming attractive to institutional investors at this point of

time. The yield on the 10year Italian government bond yield is presently 7.25 per cent (source: Italy, department of Treasury). As a result, traders said, interest from foreign investors in Indian government bonds was unlikely to be significant.

The shortage of dollar supplies in the foreign exchange markets and low capital account flows also sparked a dollar shortage.

The shortage reflected in high short term forward and low long term forward premiums. But there was likely to little reprieve. In the non-deliverable forward markets (off shore trading in Rupees and settlement is done in u s dollars) the dollar was priced at a record Rs 51.71. On the onshore market one month forward was priced Rs 50.61 indicating another round of outflows or another tumultuous week.

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