Budget blues bog down bonds

MUMBAI: Uncertainty over the Budget announcements and the tension of an imminent American attack on Iraq is roiling the bond markets with corporate and bank treasury managers pulling out their investments from mutual funds, government securities and corporate bonds.
Investors are reallocating these funds to the cash market, including the call money market, the one-day and three-day reverse repo markets, and even to the liquid plans of mutual funds.
Over Rs 5,000 crore has been pulled out from debt mutual funds and an even larger quantum has been drained from the gilts market since mid-January, said an SBI Mutual Fund manager.
Sources said the corporate bond market had borne the bear pressure, with daily trading volumes dipping to a measly Rs 25 crore from an average Rs 400 crore two months back.
Investors in government bonds, mainly banks and corporates, are cutting their losses on these investments. The 10-year benchmark government paper has lost Rs 4.50 since mid-January.
In mutual fund schemes, too, investors have over-reacted to unusual volatility in the recent past, which has been triggered primarily by war tensions and Budget apprehensions.
Several shot-term plans, gilt schemes and income plans of various mutual funds witnessed one-day annualised negative returns last week, triggering fears of a further value erosion among investors.
Fund managers have instead hiked their cash exposure through various liquid schemes. The average exposure to such schemes as on February 21 had risen to 15 per cent.
"Every year, investors spruce up their balance sheets just before Budget time in preparation for the close of the financial year. This year, however, there has been an unusual over-reaction to various extraneous factors, and funds are witnessing severe redemption pressure across debt schemes," said a Birla Sun Life fund manager.
"Elections due in several prominent states this year and the general election next year are bound to have an impact on the Budget, and investors are expecting some big-bang announcements," said a fund manager.
"In fact, the one-day reverse repo rates have touched 5.3-5.4 per cent, a notch below call money rates, indicating the liquidity overhang in this short-term cash market product. The three-day reverse repo rates have also started reacting to the easy liquidity conditions," he added.