Bonds - Street wants more short-tenure govt bonds

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Banks, Mutual funds prefer such bonds as interest rates ARE set to rise further

Banks and mutual fund houses are keener on filling up their portfolio with shorter-tenor gilts as interest rates are set to go up further. As a result, the Reserve Bank of India (RBI) has decided to issue more gilts in the 5-9 year maturity every week for the first half (April-September) of the next fiscal.

"The broad anticipation is that interest rates may go up further. Due to which we are keener on buying papers in the 5-10 year duration," said Arvind Sampath, head of interest-rate trading at Standard Chartered Bank. The RBI has already raised policy rates by 25 basis points each earlier this month to deal with the burgeoning inflation. Economists expect a further hike on April 20 when the RBI will announce the monetary policy for 2010-11. When interest rates are rising, shorter-tenors are more preferred. Thus, in order to avoid higher risks, banks and fund houses are opting for shorter-tenor. The other reason is that banks invest in gilts to adjust their asset-liability mismatch. "Banks also invest in gilts to adjust their short-to-medium term liabilities and would prefer to invest in the 5-9 year maturity bucket," said Arun Kaul, ED, Central Bank of India.

Mutual funds also prefer shorter-tenor gilts and currently majority of their portfolio comprises gilts with a tenor of 2-3 years. Going forward, the preference may remain same. "We are looking for investing in gilts which mature in less than five years," said K Ramkumar, head (fixed income), Sundaram BNP Paribas Mutual Fund.

The scenario was different last year when RBI had issued more gilts in the 10-14 year maturity amid ample liquidity. "Last year, the central bank had also done Market Stabilisation Scheme (MSS) unwinding and purchased gilts under its open market operations. This year, the RBI has not announced such moves. So it has to be more market-friendly by selling shorter-tenor gilts," said Lakshmi Iyer, head (fixed income) at Kotak Mahindra Mutual Fund. Under MSS, RBI issues gilts and/or treasury bills on behalf of the government and the money raised under this is held in a separate account titled MSS account. The unwinding of MSS results in pumping more liquidity in the system.


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