Few takers for long-term government securities

Blame it on the underdeveloped pension and insurance market or uncertainty on the long-term outlook on interest rates, long dated papers have hardly any takers in Indian markets.

This is at a time when the US Federal Reserve is planning to re-introduce the 30-year bond.

A large chunk of the government borrowing programme consists of gilts of five to 10 years maturity. Though there are papers of 28 to 32 years maturity in the market, they are of lesser quantity. Securities that mature after 10-12 years hardly get traded. In other words, most of them are illiquid.

"The trading volumes in the secondary government securities market speak for itself. One cannot blame the regulator for not floating too many long-term papers," said a dealer.

In a bullish market in 2002-2003, the trading turnover of a 15-year paper in a month (December) was Rs 28,553 crore and the number of trades was 5034.

In December 2003-04, the turnover of the 15-year paper slumped to Rs 5485 crore and the number of trades fell to 920. In December 2004-05, it dipped further to Rs 41.27 crore with the number of trades dwindled to 11. In April, 2005, it came down to Rs 8.76 crore with only four trades.

Similarly, trading in a 20 year paper, which was Rs 7,125 crore in December 2002, came down to Rs 525 crore in December 2003. The 30-year paper's trading volume dipped from Rs 595 crore in December 2002 to Rs 5 crore in December 2004.

"Players in insurance and pension funds may be keenly looking at the 30-year paper. In India, banks are the largest investors in government securities but they are busy bringing down the duration of the investment portfolio to 4-5 years," said Partha Mukherjee, treasury head of UTI Bank.

In a bullish market, one basis point (one hundredth of a percentage point) movement in the interest rate results in upward movement in prices by 11-12 paise in a 30-year paper but only about 4 paise in a 5-year paper. In a bearish market, it is just the reverse.

"Who will take the risk, particularly when there is no retail market to offload the paper," another bond dealer said. The spread between a one-year and a 20-year paper in the United states is 100-120 basis points while in India it about 215 basis points.

A market analyst said that while an interest rate hike in the United States is fully factored in, the market in India is not fully convinced about the RBI action.

"The US Fed independently manages the monetary policy while in India fiscal policy always influences the management of the monetary policy," the analyst pointed out.

He added that instead of sticking to its earlier resolve of extending the tenure of government papers in the market by floating long-term papers, the Centre is increasingly focussing on short-term papers attractive to banks. This ensures the success of the government's borrowing programme.