By Joydeep Sen
Whereas 2020 has been a difficult 12 months for people and for economies, it has been good for asset markets. The challenges posed by the economic system or structural points had been compensated by central banks stepping in with liquidity and succour. Whereas the talk rages on within the fairness market between basic valuations and liquidity pushed rally, within the bond market it’s a little totally different.
In March 2020, the bond market went right into a freeze. Yield ranges shot up. Even liquid funds gave unfavorable returns for a couple of days. What occurred?
l Within the preliminary section of work-from-home, buying and selling volumes had sunk. Individuals have web at residence, however there are specialised buying and selling techniques within the workplace. This stuff obtained sorted out progressively by VPN, and many others., however that took a while.
l Banks weren’t taking a view on constructing positions on bonds, resulting from uncertainty and approaching year-end. They had been simply parking the excess liquidity with RBI itself in reverse repo.
l FIIs /FPIs had been promoting closely in March. In a market in standstill, this added to the issues.
l Individuals had been ready for RBI measures. RBI was doing one thing (OMO, LTRO), however market contributors anticipated extra. And stored quiet, i.e., they weren’t shopping for.
l Sentiments being unfavorable, mutual funds confronted redemption strain. This compounded the issues as there was extra promoting strain available on the market. Liquid funds anyway noticed the customary March advance-tax associated outflows.
l Security was perceived in in a single day funds, and everyone rushed there. On account of extreme demand in in a single day funds or the TREPS market, charges got here down drastically, however had been optimistic. In a single day funds don’t give unfavorable returns.
l All these points compounded and the volatility led to liquid funds giving unfavorable returns for a couple of days.
Progressively issues improved as RBI, intervened with incremental measures. The RBI Coverage Overview was preponed to March 27. Aside from the speed reduce, the focused long run repo operations (TLTRO) of Rs 1 lakh crore was meant for buy of company bonds. It couldn’t be used for buy of G-Secs or parking with RBI in reverse repo. This helped the stagnant company bond market, as there was anyone to buy, i.e., banks with the assistance of straightforward cash from RBI. The TLTRO company bonds had been free from mark-to-market volatility for banks. The subsequent announcement on April 17 of TLTRO 2 was one other optimistic. The purchases to date had been in higher high quality bonds (PSU, AAA). The opposite section (lower than AAA / NBFCs) was not getting the assist. TLTRO2 of Rs 50,000 crore was focused to NBFCs and MFIs, and 50% of this was focused to small / mid-sized NBFCs.
Over the course of the 12 months, RBI stored the assist techniques on by price cuts (repo price reduce by 1.15% since February 2020) and different measures—reverse repo was reduce additional to three.35%, infusion of liquidity transferring the efficient in a single day price to reverse repo price of three.35% and even under moderately than the repo price of 4%, OMO purchases for the massive G-Sec borrowing programme, OMOs on State Improvement Loans, twist OMOs (buy of lengthy maturity G-Secs and simultaneous sale of brief maturity papers to assist the longer finish of yield curve), and many others. On prime of this, RBI reiterated the dedication to keep up the accommodative stance on charges and assist to the market into the following monetary 12 months.
Yield ranges remained supported by liquidity in 2020; 10-year G-Sec yield presently being sub 6% and 3-month Treasury Invoice being lower than the reverse repo price of three.35%. In 2021 as properly, authorities borrowing goes to be large, as it would take a very long time to come back again to fiscal prudence. So long as assist from RBI stays, the market will probably be there the place it’s. Nonetheless, someplace in future, both in 2021 or later, RBI must consider exit from the extreme liquidity. That may be a turning level for yield ranges within the bond market. For debt mutual fund traders, returns can be extra life like because the carry yield (portfolio YTMs) have eased in 2020 and the rally is kind of accomplished.
The author is a company coach (debt markets) and an creator