Long yields distort curve

Long-dated government securities are yielding higher returns than the shorter ones, thereby distorting the yield curve.

On Tuesday, which was a very 'violent' day yieldwise, a single session saw yields plunging by as much as 19 basis points in the benchmark papers. They have recovered slightly today.

But on Wednesday, when the market rallied the most, and the rate of return on various government papers went out of sync with the maturities.

While the benchmark ten-year paper is trading at 5.99-6.02 per cent, the nine-year paper is being offered for 6.19 per cent. Similarly, in the shorter end, the four-year paper is trading at a yield of 6.07 per cent, while the five-year paper is at 5.84 per cent.

In the longer end of the maturity curve, the 19-year paper is giving a yield of 6.70 per cent, whereas the 17-year gilt is yielding 6.70 per cent. Dealers said the distortion is primarily due to preferred buying in some counters just to adjust the benchmark paper.

The public sector banks, the big daddies of the securities market which usually act as market maker in times of interest rate turbulence are fence-sitters this time.

They are busy avoiding any loss in trading portfolio before the quarter ends and awaiting signals from the central bank which could help protect their bottomline.

However, they are a happy lot as the benchmark interest rate for 10- year government securities is coming down without much action from them. The bond market is now managed primarily by primary dealers who after being stuck with losses in the last June quarter are leaving no stone unturned to bring down the yields.

"There are four to five primary dealers who are aggressively quoting the benchmark government papers. The over-participation by a section of the market has made the yield curve distorted. In the process, they are ignoring all facts about inflation, interest rate announced in the last few days", said a treasury head in the private bank.

Some of the banks have also suggested to Fixed Income Money Market Derivatives Association to realign the yield curve as per the ten-year benchmark rather than just depending on the market quotes and yields to provide the yield curve. This is because the market is not well participated and quotes are haywire, said a banker.

He went on to add that if the yield curve repositions itself with the current ten-year benchmark, the problem of balance sheet management could be tacked within the market without any support from the Reserve Bank of India.

Bankers said the yield on June 30 ended at 5.84 per cent and therefore any level below it will be welcome to the extent the investment portfolio does not incur any loss while marking to market the portfolio. Marking to market is an exercise which is done to evaluate the gilts kept for the trading purpose as per the current market price.