Archive for the ‘Money Market’ Category

Monthly ; Currency, VoA, Debt & Money Market Update

Read my note on Currency, India Macro, VoA, Debt and Money Market.

Download – Monthly Note

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Monthly Liquidity Monitor – November 2013

Read my note on liquidity  for November.

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Short Term US Yield Curve Inverts

About 8 lakh government employees is the US are now on an unpaid leave as republicans stick to their point to tweak Obamacare programme such that its impact on the spending budget is reduced. However, President Obama and democrats continues to remain firm to implement the aforesaid programme in full force. This has led to a gridlock in the house as members fail to pass the budget. This impasse cements view of more trouble going forward as US treasury run down of cash. US treasury will be left deserted by the third week of October after which Federal body won’t be able to honor its obligations. Immediately after 17th Oct (after which many believe treasury to go empty), treasury needs to retire Tbills coming up for maturity. Hence the risk of holding a Tbill maturing near the end of Oct Till first few days of Nov is perceived to be very high. This can be observed from the below table.

US Yields


Yields on 1M paper has risen from ~0.00% to almost 0.12%. Asset managers and banks there have increased their duration by adding longer tenure bonds in order to avoid a delayed payment (technical default). Increased demand for long papers compelled yields to retreat from levels seen 10days before. As we move ahead towards the mid of this month short end of the curve may continue to move upward on the back of incremental risk. House faced similar obstacles in early august 2011 as well to raise the debt ceiling however the much needed then was done 3 days before the treasury starts defaulting. Dollar index and US equity market will continue to shrink till the time US resolves the issue or a big figure announces a firm commitment pertaining to the same.

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Liquidity Monitor – September 2013

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Liquidity Monitor – Note on current situation

Hey, below is a brief  note on Liquidity and outlook for the same. You may find it irrelevant if the gap between posting date and today is substantial.

Seasonal Lean Period of Banks (Benefits of Buying CD in March)

Lean season is present in almost all sectors barring healthcare and food Industry. Banks too have to go through lean season where lending slows down but deposit continues to grow. First quarter and some extended part thereon is the lean season for banks when corporates borrow less. This indeed improves cash balance with banks and hence banks reduces their CD issuances significantly post March end. Then arises a situation when demand for funds is low which subsequently leads to fall in short term rates.  Below is the chart where one can understand the lean period effect highlighted by thick black bars.

Falling Short Term Rates

How do fund managers benefit from this seasonality?

Fixed Income Fund Managers by February end starts switching their portfolio from G-sec to short term papers . CD rates are high during Feb end and whole of March. They buy papers at high yields and sell the same in May-June at a lower yields benefiting from capital appreciation. No doubt there arises a risk of reinvestment for the fund managers but most of them start moving to G-sec/Long corporate papers as by April-May supply premium would have already been priced and rates should be on the verge of a fall on account of OMO expectation.

CD CP Return March April

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FII Debt Limit Auction – Details

Refer this latest press release of SEBI (SEBI Circular) on enhanced FII debt limit wherein each head is described to its best. One can understand broadly which securities are included under different segments identified by the watchdog. Auction is scheduled on every 20th. FII debt limit auction could be held on the next working day in case 20th happens to be a holiday. Auctions would be held on recognized exchanges like BSE and NSE if free limits greater than Rs1000 crore are available for any of the three categories — Government Securities (G-Sec), corporate bonds and long-term infrastructure corporate bonds. One has to bid in premium terms. FIIs have to utilize these limits within 90 days in case of corporate debt and long-term corporate infrastructure debt. The time period for utilizing G-Sec limits is 45 days. FIIs bid in bps as premium to actual yield. When they feel bonds are undervalued they probably bid with higher premium and vice versa. If an FII bid for Gsec at 8bps then that signifies that he/she is willing to buy Gsec (which is currently trading at 7.5%) at 7.42%. These figures are not released by the exchange and are difficult to find on SEBI’s portal.  An FII can let the auction limit get lapse but that doesn’t mean that they will be refunded with their bid premium.

Find information on most recent auctions here : BSEINDIA & NSEINDIA

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Factors affecting money market rates {Excel on CBLO-CD allocation attached}

Money market rates move in tandem with liquidity condition in an economy. As far as India is concerned major factors affecting liquidity are
• Currency in circulation
• Government cash balance
• Credit Deposit Growth differential
• Open Market Operations
• FX intervention (spot markets)

Liquidity deficit is structural in nature. Every quarter end heavy chunk is sucked from the system on account of advance tax outflows. Liquidity also marginally gets worse every month end/start as currency in circulation increases on account of salary draw down  Sale of govt. resources also affects liquidity due to cash outflow. Situation of liquidity going forward can be to some extent easily analyzed contemplating above factors. Normally in the month of February and August end fund managers sit on cash awaiting better yield CDs as tight liquidity and heavy supply increases the yield of short term papers. Now they probably work on whether to invest in CD right away at 9.05 %( hypothetical) or wait (i.e. invest in CBLO synonym to cash @7.75% [near to RBI’s REPO rate]) for few days and pick same maturity CD at 9.25%.

Below is the excel sheet wherein one can contemplate and see if it’s better to lock in money in a CD right away or wait for sometime placing the same cash in CBLO.

Download – Money Market Investment Decision

Examples performed

If CD rates after 20days are expected to be at 9.40%. Currently CD is at 9.05%. CBLO is at 7.75% then probably it is better to get into CBLO for 20days then invest in CD @9.40%. Annualized yield would then be 2bps higher comparatively.

If CD rates after 25days are expected to be at 9.40%. Currently CD is at 9.05%. CBLO is at 7.75% then probably it is better to get into CD right away at 9.05%. Annualized yield would then be ~6bps higher comparatively.

Appreciate your inputs…

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HTM, AFS and HFT explained

We often hear RBI mulling either to increase or reduce HTM %. Lets understand how it impacts liquidity…

Banks garner money and lend to the needy earning the arbitrage. We know as SLR banks have to keep some percentage of funds in G-sec, SDLs and gold. Apart from that banks also invest in securities/subsidiaries which they assume will perform well. In all, banks invest huge chunk of their money in different set of  instruments and subsidiaries.

Investment of banks is classified in to three categories

  • Held to maturity(HTM)
  • Available for Sale(AFS)
  • Held for trading(HFT)

While investing banks clarifies it as either of above three. Securities acquired by the banks with the intention to hold them till maturity will be classified under Held to Maturity. The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/ interest rate movements etc. will be classified under Held for Trading. The securities which do not fall within the above two categories will be classified under Available for Sale.

Securities bought under HFT should be traded in 90days else it then falls under AFS category.

Let’s understand with an example

  • ABC banks has total investment of Rs.100. below is the breakup (as per balance sheet)
  • Govt. Securities – 40rs
  • Other Approved securities – 10rs
  • Shares – 20rs
  • Debentures & Bonds – 20rs
  • Subsidies/JVs – 10 (this comes under HTM by default)
  • Others – 0

Banks do not present HTM, AFS and HFT classification in annual reports. Let’s assume below is the classification.

  • HTM – 25rs
  • AFS – 60rs
  • HFT – 15rs

RBI has issued guidelines for banks not to exceed HTM above 25% for their investment. But why would banks love to hold till maturity. It is because HTM portfolio are not marked to market so temporary losses due to inching up rates (which will drive prices down) will have to be adjusted in balance sheet thereby dampening the numbers.  Now, The moment RBI reduces HTM from 25% to 23%, banks have to take 2% of that securities in AFS which then has to be marked to market. Hence banks at appropriate time dump the G-sec in the market (specially falling rate market) to book profit and avoid showing losses/depreciation on account of Mark to market. This improves G-sec supply and hence liquidity in the market (Note : At the same time long term G-sec rates recedes to some extent on account of increased supply in the market).

Appreciate your inputs.

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Commercial Paper / Certificate of Deposit Valuation – for Debt/Fixed Income Dealers

Commercial paper and Certificate of Deposit are one of the most prominent instruments in money market. Banks, corporates, Asset Managers, NBFCs and Insurance companies are the main players in this market.  As we all know there exist adequate infrastructure for equity trading on exchanges but in case of debt instrument, OTC (Over the Counter Trade) works well.  In this segment of market buyer and seller are brought to a deal by a Broker/Dealer who in turn charges for the same. Every deal done over the counter is to be reported on FIMMDA platform within a stipulated period of time (currently 15mins).  Below is the valuation methodology for CP CD pricing which might help prospective dealers and other participants in the market. Method doesn’t matter unless you are correct in your calculation.

 CD CP Calcualtion

Value date: This is nothing but the date when funds will be credited to the seller and security will be delivered in buyers account. Remember value date is not always the date of dealing. Normally if deal is executed after 1pm then value date is most probably the next day. It is on Buyer and seller when they wish to exchange the security for cash.  Trade happen on 2-Jan-2013 can have value date at 4-Jan-2013 if both buyer and seller wish so.

Maturity Date: CD/CP instrument cannot have maturity of more than a year (CP in some case can be of more than a year).

Days: This is the number of days buyer will be holding the security or say number of days to maturity from value date. (Maturity Date less Value Date in Excel)

Yield: This cell needs to be left blank for the dealer to check price of the instrument (CD/CP) whereby dealer can play with rates and check the price for varying yields

Price: Many try to complete all steps in one cell but it’s better to go step by step which not only helps you understand crux of valuation but also reduces the probability of errors.

Once it is ready Dealer can edit the level of yields (which is done in the example) to get the price of the security.  Yes, once the sheet is ready one can also edit Value date and Maturity date (to price new CD/CP).Yields are inversely related to price of the instrument. Hence when the yield rises from 8.50 to 8.60%, price of the instrument falls from 245966750 to 245943500 (i.e. price falls by Rs.23500). This signifies that buyer has to pay ~24.59Cr and will get the par value i.e. 25Crs on maturity making the differential amount.

I am also attaching excel sheet for you perusal.:) CD CP Valuation Sheet

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