By Nimesh Vora and Dharamraj Dhutia
MUMBAI (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)
