By Nimesh Vora and Dharamraj Dhutia
MUMBAI, Feb 15 (Reuters) - The anticipation of Housing
Development Finance Corp , India's largest mortgage
lender, executing an interest-rate hedge once it completes its
mega bond sale this week, is driving longer-duration bond yields
lower, traders said on Wednesday.
The lender aims to raise at least 50 billion rupees ($603.4
million) through the sale of 10-year bonds on Thursday, with an
option to retain an additional 200 billion rupees.
To convert the fixed coupon payments on these bonds to
floating payments – to match the interest rate profile on the
loans it issues – HDFC is considering total return swaps,
bankers with direct knowledge of the matter told Reuters.
"HDFC is likely to do the trade on or post Friday, once it
receives the money from its bond issuance," one of the bankers
said.
Under the trade, the banks will pay HDFC the yield on a
government bond and in return receive the benchmark overnight
rate plus a markup. The price risk on the bond is borne by HDFC
and hence the name total return swap (TRS).
And when the banks execute these swaps, there will likely be
bunched-up demand for these bonds, which will pressure yields,
traders said.
"The anticipation of HDFC's trade started playing out since
late yesterday," said the banker quoted above. "Plus, the
non-reaction to the U.S. (inflation) data has led to short
covering."
The 10-year benchmark 7.26% 2032 bond yield was at 7.35%, after hitting 7.40% on Tuesday. This is despite
the U.S. inflation data cementing the likelihood of at least two
more 25-basis-point rate hikes by the Federal Reserve.
HDFC did not immediately reply to a Reuters' email seeking
comment.
ORGANIC DEMAND
Moreover, market participants said HDFC has been buying a
larger-than-normal quantity of government bonds ahead of its
merger with lender HDFC Bank, which will be likely completed
next financial year.
That, said traders, is because the merged entity may have a
higher statutory liquidity ratio (SLR) – the minimum percentage
of deposits commercial banks are required to invest in liquid
assets, such as government bonds.
"There could be demand from HDFC on two fronts – one would
be the purchase of securities to maintain Statutory Liquidity
Ratio and Liquidity Coverage Ratio needs after the merger with
HDFC Bank," said Venkatakrishnan Srinivasan, founder and
managing partner of debt advisory firm Rockfort Fincap.
"Another would be for TRS-related buying."
(Reporting by Nimesh Vora and Dharamraj Dhutia; Editing by
Savio D'Souza)
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