Bond market could shrink on recap bonds
, ET Bureau|
Updated: Oct 24, 2017, 10.37 PM IST
The bond market could shrink further Wednesday as jittery traders may prune holdings on expectations of additional supplies of sovereign securities after New Delhi said it would inject cash into state-run banks through re-capitalisation instruments.
The benchmark bond yield may rise about five basis points in a few days pulling prices down, dealers said. It closed at 6.78%, a tad lower than a day before. The government announcement on recap bonds came after markets ceased trading for the day.
“The bond market yields are likely to rise temporarily amid a bear market sentiment,” said Jayesh Mehta, MD & Treasurer, Bank of America. “If yields rise, that could give a new entry point to long term investors.”
The government will issue re-capitalisation bonds that banks will subscribe directly. If banks are allowed to sell their holdings in the secondary market, they will get space to expand their loan book. But such a move may add to extra supply.
“These recap bonds can only be sold in the secondary market if they are priced appropriately,” said Piyush Wadhwa, head of rates trading at IDFC Bank. “We are almost at the end of a rate-cut cycle, limiting the opportunities for banks to sell them at a profit.”
These bonds are likely to have non-SLR status. Statutory Liquidity Ratio, or the portion of deposits that banks are mandated to keep in government bonds, is now at 19.5%.
The benchmark bond yield may rise about five basis points in a few days pulling prices down, dealers said. It closed at 6.78%, a tad lower than a day before. The government announcement on recap bonds came after markets ceased trading for the day.
“The bond market yields are likely to rise temporarily amid a bear market sentiment,” said Jayesh Mehta, MD & Treasurer, Bank of America. “If yields rise, that could give a new entry point to long term investors.”
The government will issue re-capitalisation bonds that banks will subscribe directly. If banks are allowed to sell their holdings in the secondary market, they will get space to expand their loan book. But such a move may add to extra supply.
“These recap bonds can only be sold in the secondary market if they are priced appropriately,” said Piyush Wadhwa, head of rates trading at IDFC Bank. “We are almost at the end of a rate-cut cycle, limiting the opportunities for banks to sell them at a profit.”
These bonds are likely to have non-SLR status. Statutory Liquidity Ratio, or the portion of deposits that banks are mandated to keep in government bonds, is now at 19.5%.
