Three Signs Of Stress Emerging In India’s Debt Markets
These signs are showing up in different parts of the money markets.
The Indian debt markets are showing signs of strain due to a risk averse environment, coupled with year-end redemption pressures faced by mutual funds and continued selling by foreign investors.
These signs are showing up in different parts of the money markets. The interest rates offered for borrowing overnight money have crashed as funds and corporate treasuries have moved into cash. Corporate bond yields are rising as funds sell out of these securities to meet redemption pressures. Volumes in government bond markets have fallen — there was no trade for the first 32 minutes today — due to logistical troubles brought on by curfews and a disconnect on which way rates are headed.
Overnight Rates Plunge
The first sign of stress is emerging from the overnight lending market. There are two parts to this segment — the inter-bank market and the tri-patry repo market.
Banks can lend and borrow between each other in the inter-bank market. Besides they can park surplus cash with the Reserve Bank of India’s reverse repo market and earn an interest of 4.9 percent. Non-banks, which includes NBFCs, mutual funds and corporate treasuries, mostly do overnight borrowing and lending via the tri-party repo market.
The rates in this market have fallen sharply as funds and corporate treasuries are holding large amounts of cash, which they don’t want to invest in any long term instruments. They are instead offering this cash in the overnight market to earn some return on it.
Data from the Clearing Corporation of India Ltd shows that on March 23, Rs 2.34 lakh crore was parked in tri-party repo facility. As a result of the large inflow of funds, the weighted averaged rate for tri-party repo came down to 3.48 percent on March 23 compared to 4.81 percent on March 24, for the two-day tenor. On Tuesday, a further Rs 2.08 lakh crore was traded on TREPS for the two-day tenor and rates fell further to 1.10 percent.
According to Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. Ltd, the market has excess liquidity and corporates would want to keep money in liquid assets, which is why TREPS volumes has risen.
“Money has moved from liquid funds to short-term funds and now to overnight funds because of the mark-to-market risks they are facing. Additionally, since its the end of the financial year, many funds like insurance companies or pension funds would rather hold onto cash,” he said.
A fixed-income fund manager, while speaking on the condition of anonymity, said that funds are fearful of redemption pressure and are selling some bonds. Funds are moving money to liquid overnight funds, to generate some short-term returns in the TREPS window, this person said.
Corporate Bond Yields Rise
As funds move towards the safety of cash, there are fewer takers for corporate debt.
This holds true for short term commercial paper, where yields rose for individual firms as foreign investors exited their holdings. It also holds true for longer term corporate bonds where yields have risen.
Data from the Bombay Stock Exchange and National Stock Exchange shows that several AAA-rated corporate bonds issued by non-banks and public sector undertakings have seen yields rise by 100 to 150 basis points in secondary market trades.
These include bonds issued by Reliance Industries Ltd, Power Finance Corporation, Indian Railway Finance Corporation, LIC Housing Finance, Housing Development Finance Corporation and even those issued by banks like State Bank of India and Bank of Baroda, to name a few.
We saw 10-year AAA corporate bond yields move to above 7 percent two weeks ago and are now closer to 8 percent. Shorter term papers, for instance 3-year AAA-rated bonds, have moved from 6.5 percent to over 7.5 percent. It seems that at a minimum yields have moved up by 100 basis points in an environment where otherwise things have not deteriorated, whether it is credit events, rate hikes or tight liquidity.R Sivakumar, Head - Fixed Income, Axis Mutual Fund
According to Chari, the large selling by foreign investors in government securities and PSU bonds led to the higher yield. “There is a general risk-off scenario which makes PSU bonds also illiquid. This is not a credit-risk sell off, it has more to do with market liquidity,” Chari said.
Low Volume In Government Bonds
In the government bond market, trade has so far been relatively orderly. Yes, bonds yields have risen but that reflects a fast evolving macroeconomic situation.
However, a peculiar thing happened on Tuesday morning. For the first half hour, there was no trade concluded as the difference between the bidding prices and the asking price varied widely.
Even an hour into trade, only Rs 35 crore in securities were traded, said the fixed income manager quoted above, adding that the market is virtually closed with very few counter-parties ready to deal.
What happened?
Traders have reduced their positions and if everyone reduces their positions, the market dries up, said Sivakumar. “But the bigger issue is the failure of infrastructure. Traders are not geared up to work from home,” he added.