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NBFC Commercial Paper Yields Spike Amid Selling Pressure

A handful of trades have taken place in the secondary market for commercial paper which reflect the extent of nervousness.

Traders react to market volatility due to Coronavirus. (Photographer: Michael Nagle/Bloomberg) 
Traders react to market volatility due to Coronavirus. (Photographer: Michael Nagle/Bloomberg) 

Heavy selling by foreign investors and mutual funds has led to a jump in yields in the commercial paper market, which hasn’t spared even the most blue-chip of non-bank lenders.

The selling across local debt mirrors other asset markets ranging from equities to commodities, where the accelrating global spread of coronavirus has prompted investors to liquidate holdings.

Over the course of this week, a handful of trades have taken place in the secondary market for commercial paper which reflect the extent of nervousness.

According to data from the Fixed Income Money Market and Derivatives Association of India:

“The yields began to rise initially due to selling by foreign investors and now mutual funds are facing redemption pressure, so liquidity is a challenge at this point. Foreign investors want to pull liquidity back therefore, pricing becomes a secondary issue,” says Mahendra Kumar Jajoo, chief investment officer, fixed income, Mirae Asset Global Investments (India) Pvt. Ltd.

Data from the National Securities Depository Ltd. shows that foreign portfolio investors have sold over Rs 43,423 crore so far this month, until March 20. Selling in debt has accelerated significantly in the last few days.

The rise in CP yields in the secondary market is a second-rung effect stemming from the sell-off by foreign investors in the last three months, said Jajoo.

A debt market dealer, speaking on condition of anonymity, said that despite liquidity being in surplus and the RBI announcing bond purchases and long-term repo operations, yields on CPs may remain elevated. Even for AAA-rated issuers, the evolving economic conditions may lead to liquidity and demand side concerns.

The local spread of coronavirus and severe social distancing measures imposed by states could lead to “sudden stops” for businesses, cautioned Sajjid Chinoy, chief India economist at JPMorgan in a conversation with BloombergQuint. “The impact can be sudden, sharp and non-linear,” he cautioned.

Such disruptions could lead to asset quality concerns for lenders too.

Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management Company Ltd., however, says the recent trades in the CP market are more reflective of across-the-board selling and not of concerns about individual businesses.

“The current sell-off is not in any way indicative of the nature of credit quality of the entity, there is an en masse sell-off that is happening. FPIs are trying to liquidate whatever is possible,” she said.

While a few stand-out trades have caught attention, yields in the broader CP markets are also on the rise.

“Yields across the rate curve have moved up sharply in a short period of time due to risk-off sentiment exacerbated by Covid-19 outbreak,” said Siddharth Chaudhary, fixed income fund manager at Sundaram Asset Management Company Ltd. “In money markets even top rated CP have seen upward movement of 150-175 bps in last couple of weeks.”

According to Chaudhary, selling pressure from few quarters due to risk aversion has resulted in volatile rate movements leading to a certain degree of dislocation in the market despite the presence of ample liquidity in the system and no major issuances.

This article has been updated to exclude the trade in the Aditya Birla Finance commercial paper since that issuance was done in the context of the SBI Caps IPO. The error is regretted.