Banks feel the heat of gilt spike

Gilt kitty valuations hit as ten-year yield ends FY06 at 7.54%.

Banks face a loss in valuation of the investments in government securities as the year 2005-06 ended with a rise in yields vis-a-vis the beginning of the financial year.

The yield on the benchmark 10-year government paper today closed at around 7.54 per cent against 6.67 per cent at the beginning of the year.

According to bankers, the banks' trading portfolio, will be hit by a price fall of Rs 7-9, on an average, given the estimate that each basis point rise in the yield translates into a price fall of 8 paise in the 10-year segment.

Bankers added that most of the banks have already shifted their government securities from the trading portfolio to the non-trading portfolio, lest it will be a valuation loss for them.

Banks have to 'mark to market' their investment portfolio at the end of the financial year. 'Mark to market' refers to valuing of investments at the end of the financial year vis-a-vis the prices at the beginning of the year.

The government securities market witnessed a sharp rise in yields today "" the last day of the financial year, as the sentiment was marred by global oil price hike and spike in US treasury yields.

The crude oil touched a high of $67 a barrel, while the 10-year US treasury bond rose by 14 basis points in one trading session to a high of 4.85 against 4.71 per cent on Thursday.

The top traded paper 8.07 per cent 2017 closed at a four-year high of 7.54 per cent against a closing of 7.43 per cent on Wednesday. At present, the 8.07 per cent 2017 paper is treated as the proxy for the 10-year benchamrk government security.

According to bank dealers, the sharp hike in the yields of the government securities reflect the fact that the market outlook on the interest rate, going forward in the new financial year, will remain firm.

The liquidity in the market was tight, since banks refrained from lending as they preferred to remain liquid on the closing session of the financial year-end. The call rates touched 6.40-50 per cent during the day.