Under the security-switch mechanism, most banks are currently making a marginal spread by getting out of one security portfolio and entering into another without increasing their fixed investment commitments.

"As most foreign banks have stringent fixed targets and deadlines to meet by the end of the calendar year, they have devised a strategy based on their market perception by carving out a little margin at the time when the trading volumes in gilts have fallen drastically," said a fund manager from a private sector bank.

According to analysts closely tracking the gilts market, due to stable market conditions and falling spreads, most banks actively trading in the gilts market areswapping the short-dated bonds depending on their individual perception on the movement of a particular bond.

In a bid to acquire actively-traded securities -- triggered by the perception that short-term interest rates will firm up further -- most banks are exiting from their long-term securities maturing between seven and 10 years and buying short- and medium-dated papers maturing between one and five years while incurring a marginal loss.

"Most banks holding long-maturity papers are swapping them at 4-5 paise less than the existing price quoted in the secondary market with short-term bonds as the risk attached to short-term maturity paper is lower due to their high tradable value," money market dealers said.

Likewise, most trusts, provident funds and infrastructure companies are more than willing to subscribe to long-term papers as their objective is to meet long-term liabilities with long-term assets. "As we are getting long-term papers at 3-4 paise lower than the existing secondary market rate, weare happy with the buy," an official from a provident firm said.

Active debt market players including a few foreign and private sector banks are swaping short- and medium-term papers maturing between one and five year depending on their strategic policy and market view. The objective is to improve the current market yield of securities held in their portfolios.

Most banks holding on to the one-year maturity paper offering 10.80-10.90 per cent yield are swaping these instruments with two- and three-year paper carrying a yield of 11.45 per cent and 11.65 per cent, respectively, thereby improving the current market yield of their gilts portfolio.