By Joydeep Sen
While 2020 has been a difficult year for humans and for economies, it has been fantastic for asset markets. The challenges posed by the economy or structural problems had been compensated by central banks stepping in with liquidity and succour. While the debate rages on in the equity industry involving basic valuations and liquidity driven rally, in the bond industry it is a small distinctive.
Looking back
In March 2020, the bond industry went into a freeze. Yield levels shot up. Even liquid funds gave adverse returns for a couple of days. What occurred?
l In the initial phase of work-from-residence, trading volumes had sunk. People have web at residence, but there are specialised trading systems in the workplace. These issues got sorted out progressively via VPN, and so on., but that took some time.
l Banks had been not taking a view on developing positions on bonds, due to uncertainty and approaching year-finish. They had been just parking the surplus liquidity with RBI itself in reverse repo.
l FIIs /FPIs had been promoting heavily in March. In a industry in standstill, this added to the troubles.
l People had been waiting for RBI measures. RBI was performing anything (OMO, LTRO), but industry participants anticipated more. And kept quiet, i.e., they had been not acquiring.
l Sentiments becoming adverse, mutual funds faced redemption stress. This compounded the troubles as there was more promoting stress on the industry. Liquid funds anyway saw the customary March advance-tax connected outflows.
l Safety was perceived in overnight funds, and everyone rushed there. Due to excessive demand in overnight funds or the TREPS industry, prices came down drastically, but had been good. Overnight funds do not give adverse returns.
l All these problems compounded and the volatility led to liquid funds providing adverse returns for a couple of days.
Gradually issues enhanced as RBI, intervened with incremental measures. The RBI Policy Review was preponed to March 27. Apart from the price reduce, the targeted extended term repo operations (TLTRO) of Rs 1 lakh crore was meant for obtain of corporate bonds. It could not be applied for obtain of G-Secs or parking with RBI in reverse repo. This helped the stagnant corporate bond industry, as there was somebody to obtain, i.e., banks with the aid of effortless income from RBI. The TLTRO corporate bonds had been no cost from mark-to-industry volatility for banks. The subsequent announcement on April 17 of TLTRO 2 was an additional good. The purchases so far had been in superior excellent bonds (PSU, AAA). The other segment (much less than AAA / NBFCs) was not acquiring the help. TLTRO2 of Rs 50,000 crore was targeted to NBFCs and MFIs, and 50% of this was targeted to compact / mid-sized NBFCs.
Over the course of the year, RBI kept the help systems on via price cuts (repo price reduce by 1.15% considering the fact that February 2020) and other measures—reverse repo was reduce additional to 3.35%, infusion of liquidity moving the powerful overnight price to reverse repo price of 3.35% and even under rather than the repo price of 4%, OMO purchases for the big G-Sec borrowing programme, OMOs on State Development Loans, twist OMOs (obtain of extended maturity G-Secs and simultaneous sale of quick maturity papers to help the longer finish of yield curve), and so on. On best of this, RBI reiterated the commitment to keep the accommodative stance on prices and help to the industry into the subsequent monetary year.
Looking ahead
Yield levels remained supported by liquidity in 2020 10-year G-Sec yield presently becoming sub 6% and 3-month Treasury Bill becoming much less than the reverse repo price of 3.35%. In 2021 as effectively, government borrowing is going to be big, as it will take a extended time to come back to fiscal prudence. As extended as help from RBI remains, the industry will be there exactly where it is. However, someplace in future, either in 2021 or later, RBI will have to consider of exit from the excessive liquidity. That would be a turning point for yield levels in the bond industry. For debt mutual fund investors, returns would be more realistic as the carry yield (portfolio YTMs) have eased in 2020 and the rally is more or much less performed.
The writer is a corporate trainer (debt markets) and an author