Rising yields are forcing market makers in government securities to look for ways of minimising book losses. Bond yields have risen by over four percent during the past few months forcing Primary Dealers to mark to market their portfolios and recognise losses or transfer them out.
Dealers, who buy securities on behalf of their customers and on their own account, typically leverage portfolios to maximise gains.
Any change in the gilt yield becomes magnified in their portfolios.
Falling rates increase capital gains while a spike in rates results in losses.
Primary Dealers say their average inventory has a maturity of three years or so.
The dozen Primary Dealers holding gilt securities with long maturities have seen the losses mounting on their portfolios as the yield curve shifts upwards.
In response, some Primary Dealers have started shifting out their portfolios to parent companies or other associates as investments of those companies.
Primary Dealers that are fully owned by commercial banks are able to sell the bonds to the parent who is capable of holding them as an investment instead as part of the trading portfolio.
Accounting standards don’t require investments, which an organization has the ability to hold to maturity, to be marked to market.
But trading portfolios have to be marked to market according to accounting standards.
Thin trading in the secondary market has meant that dealers have little chance of selling bonds to other Primary Dealers.
Primary Dealers are also looking at long-term funding options to fund portfolios instead of resorting to the overnight market.
-LBR Newsdesk: LBOEmail@vanguardlanka.com