STAKES in bank index’s futures contracts are mounting in the run-up to the Reserve Bank of India’s (RBI) announcement of the government’s borrowing timetable for 2010-11 Marchend and monetary policy meet mid-April. With traders expecting the government’s borrowing schedule to be detrimental to government bond yields and banks’ bond portfolios in the coming months, traders are creating positions that bet on a slide in Bank Nifty futures preceding and post-events.
“We are recommending clients to
short-sell Bank Nifty futures, as yields are rising and expected to firm up further,” said Siddarth Bhamre, head-derivatives, Angel Broking. “Traders can look at shorting Bank Nifty futures at around 9200, which is a strong resistance,” he added. The Bank Nifty index ended at 9102.95 on Tuesday. Bond yields and prices move in opposite directions. If yields rise, prices fall and vice-versa. Investors in government paper — the biggest being banks — rely on appreciation of bond prices for trading profits. Yields on the benchmark 10-year government paper have risen 40 basis points in over a month to around 8%, because of stubborn inflation and expectations of a higher
government borrowing in 2010-11 that
will increase the supply of sovereign paper during the year.
While the government has guided for lower net borrowings for 2010-11 in the Union Budget last month than last year’s, the borrowing schedule will give investors an idea on how does the central bank want to control the supply of paper into the market. Also, the market is awaiting comments from RBI on how it plans to “support” the market through open market operations (OMO), the secondary market activity and market stabilisation schemes (MSS). Investors in government bonds would want a higher “support” from RBI in the bond market this year, but few expect this outcome.
Most market participants expect the 10-year paper to rise to 8.25-8.5% in the next few months, as most of the government borrowing is expected in the first six months of the new fiscal. As a result, banks’ bond portfolios are expected to be negatively impacted. Given the bigger impact of this event on bank shares than on the broader equity market, traders are adopting a strategy that captures this outcome.
“A widely-used strategy is going ‘long’ on Nifty futures and ‘short’ on Bank Nifty futures, as Bank Nifty is seen underperforming the Nifty,” said Girish Patil, an manager-derivatives with Antique Stockbroking. This means, Bank Nifty will fall sharper than the Nifty or rise lower than the benchmark index. Another strategy that Mr Patil recommends is short-selling public sector banks and buying private banks, as further rise in bond yields is expected to impact public sector banks more because of their higher holdings of this paper. Edelweiss Securities estimates that the average impact of a 100-basispoint movement in government securities on public sector banks’ profit before tax would be 14% in 2010. But the impact would be lower this time compared to 2004-2008, it said.
“From an average of 80% in FY04, share of available for sale has come down to 25-30%, limiting the impact of investment depreciation,” it added.