Insurance players see safety in G-Secs, CD
Daily trade volume in gilts averages about Rs 21,000 crore.
C. Shivkumar
Bangalore, Jan.20 In a bid to contain risks, insurance companies, both life and
general, have begun parking bulk of their investible resources in government
securities and certificates of deposits (CD).
Traders said that insurance companies' preference for G-Secs and CDs was
largely driven by the search for safe havens. The preference for both
government securities was evident from the rising daily trade volumes. Since
the beginning of January this year daily trade volume in G-Secs, including
state development loans, averaged about Rs 21,000 crore. Equity turnover on the
National Stock Exchange was about Rs 8,000 crore per day. On Monday, G-Sec
trade volume hit an all-time record of Rs 25,378 crore, or about four times the
equity trade volume.
No mandatory floor level
A large part of this increase in G-Sec trade volume was also driven by
insurers' purchases. Traders said that both general and life insurers were
increasingly preferring G-Secs to corporate securities. Although the investment
guidelines of the Insurance Regulatory and Development Authority allow insurers
to park up to 60 per cent in corporate and other approved securities, G-Secs
remain the top of the agenda.
One reason for this preference was that the IRDA guidelines prescribe only a
ceiling and not a floor, insurance industry sources said. Since there was no
mandatory floor level, G-Secs and CDs remained the most sought after vehicles
for parking investible resources. The discrimination was evident from the high
spreads between CDs and commercial papers, which are currently close to about
600 basis points.
Attractive yields
Bankers said many insurers, especially the life insurance companies, had picked
up some high coupon securities at attractive yields. The securities included
the 7.94/ 2001, when yields were as high as 9.2 per cent in August. Life
insurers had followed the herd leader, Life Insurance Corporation, in picking
up the high coupon securities.
Even amongst life insurers with an overwhelming portfolio of ULIPs (Unit Linked
Insurance Plans), the focus remained on G-Secs. This was largely because ULIP
investors have begun migrating in droves from growth funds (investments mostly
in equities) to fixed income (investments mostly in debt) and balanced income
funds (investments in both debt and equity).
In addition, traders said that insurers were also large buyers of bank CDs,
since banks were reluctant to lift bulk deposits. The CD funds accretion into
the banking system, traders said, prompted banks to chase government securities
for meeting the prescribed Statutory Liquidity Ratio (SLR) of 24 per cent,
driving down yields. The Ten year Yield to Maturity is currently at 5.5 per
cent, down from 9.25 per cent
The chase for bank CDs resulted in rates plunging. CD rates are down to 6.5 per
cent. In August last year, banks had picked up CDs even at 12 per cent when
liquidity was tight. But times have changed and banks are quietly refusing to
take CDs beyond six months even at 6.5 per cent, anticipating further fall in
yields in the coming weeks.
http://www.thehindubusinessline.com/2009/01/21/stories/2009012151200600.htm
ekamber
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