Rising yields catch MFs, foreign banks off guard

MFs sell Rs 300 cr bonds on unanticipated yield spike

Mutual funds (MFs) and foreign banks are understood to have sold heavily in the bond market to cut down their losses following a hike in yields by 3-4 paise on a daily basis.

According to dealers, mutual funds alone sold Rs 300-400 crore bonds as gilt schemes are incurring losses with rising yields. Over the last fortnight, the yield on the 10-year benchmark government paper has risen from 5.16/17 per cent to a high of 5.30 per cent, with prices coming down.

While some dealers attribute the sales to redemption pressure, others feel that continuous rise in yields have triggered limits to the extent losses can be borne in their respective portfolios. The bearish sentiment in the domestic market is accompanied by several interest rate related factors in most of emerging Asian markets.

Dealers are of the view that dollar yields are poised to go on the back of rapid recovery in the economy, whereas the Eurozone is also expecting a hike in interest rates with rise in inflation following increased consumer spending.

Great Britain has already reviewed its base rates twice. With increased economic activity in Japan, yields are on a high with further upwards bias.

In India, the new government has signalled several welfare activities which, in turn, triggered off the fear of higher government borrowing programme. All these hint that interest rates in India are also bound to go up.

This has forced most gilt scheme managers and trading banks to reshuffle portfolio and realign it with new rate structure. A bank dealer said it is wise to do that because most banks will incur losses while marking to market the portfolio as gilts were bought at a higher prices.

After exiting the market now, these entities could re-enter at a lower price, thereby leaving room for appreciation of the portfolio.

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Feeling the pinch

• Over the last fortnight, the yield on the 10-year benchmark government security has risen from 5.16 per cent to 5.30 per cent.

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• The bearish sentiment in the gilts market is accompanied by several interest rate related factors in most of emerging Asian markets.