Here's why bond market trading was suspended for 45 min

Saikat Das
moneycontrol.com

Indian government bonds on Thursday hit the lower circuit on the back of excessive selling by foreign institutional investors (FII), who were lured by lower US Treasury bond prices. Trading was frozen on Thursday for about 45 minute between 9.15am and 10am, traders said.

Generally, a movement of one percent, be it upper or lower, results in freezing of trades in the government bond market. However, it depends on the tenure of bonds as well. For bonds, when yields rise, prices fall and vice versa.

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Later, the Fixed Income Money Market and Derivatives Association of India (FIMMDA), a voluntary market body for the bond, money and derivatives markets in India, had lifted such restriction for the day only and trading resumed as usual. An official from FIMMDA confirmed the development to moneycontrol.com.

"It was not a surprise that the bond market opened with large gap-down in line with one rupee gap-up in USD/INR," Moses Harding, head of asset liability committee and economic market research, IndusInd Bank told moneycontrol.com.

"This is also due to lack of two-way liquidity with pile-up offers against very limited bids. There is nothing surprising to note on hitting the lower circuit post hawkish stance of FED on tapering of QE by end of 2013 and complete exit thereafter by mid 2014," he said.

The 10-year 7.16% benchmark government bond (maturing in 2023) yield rose 13 bps to close at 7.40 percent on Thursday as against 7.27 percent on Wednesday. There was disappointment for the market on the timing that quantitative easing (QE) is out of the way by mid 2014 against the earlier guidance of QE support till 2015.

In the Federal Open Market Committee (FOMC) meeting, the US Federal Reserve chairman Ben Bernanke said that by the end of this year, its QE would start tapering. Hence, the fountain of liquidity is likely to ebb. This dip in liquidity will impact every asset class.

The quantum of QE will be USD 85 billion per month. However, it may come down if US economy improves going forward, Bernanke hinted.

"There has been a flight of money from emerging markets like India to the US," said Arvind Konar, head of fixed income at Almondz Global Securities.

"The US 10-year Treasury bond yield is rising. Currently, it is at around 2.38 percent as compared with a level lower than 2 percent a few months ago. This is drawing attention from FIIs. They were selling bonds aggressively, and the rupee slide was adding to their woes. Besides, India's domestic issues like widening current account deficit, slowing GDP growth and inflation are heightening negative sentiment."

The emergence of clear uptrend in US Treasury yields post FOMC meeting mean that rate cut action will be deferred indefinitely to arrest FII pull-out from India debt investments, observed Harding.
 
This means that FII inflows into debt and equity capital market will be reduced significantly. Thus, it will make it difficult to finance the current account deficit through oversea inflows.

saikat.das@network18online.com