Trading in corporate bond market picks up pace in relief for mutual funds
- Daily trade volume has exceeded ₹10,000 cr in the three days to 29 April, 15% more than the month’s daily average turnover
- Secondary market bond purchases by banks is a key part of RBI’s move to stabilize the credit markets
Trading in the corporate bonds market saw a spike this week, offering some relief to liquidity-hungry mutual funds that are facing redemption pressure in their debt funds.
Daily trade volume has exceeded ₹10,000 crore in the three days to 29 April, 15% more than the daily average turnover in April, data from the National Stock Exchange shows.
On 28 April, bonds worth ₹13,762 crore were traded, the highest in the month.
The supply side is being pushed by mutual funds, trying to raise money by selling bonds as they face massive redemption pressures, especially in their credit risk funds after Franklin Templeton Mutual Fund decided to shut down six of its debt schemes.
Mint reported on 29 April that panicked investors have pulled almost ₹9,000 crore out of credit risk funds in just three days since the Franklin Templeton fiasco.
Assets under management (AUM) of credit risk funds dropped 19% in the three days to 28 April, according to data compiled by Pulse Labs, a mutual funds data provider.
That compares with the ₹5,569 crore of outflows, or 10% of the total assets under management, in the whole of March, which typically sees higher redemptions because of year-end sales by companies.
Banks flush with capital from the central bank have emerged as big buyers in the secondary market.
“It’s the TLTRO (targeted long-term repo operation) money that is available with banks that is driving the volumes in the corporate bond market. Banks are buying papers from the market and other traders. Mutual funds are selling papers to meet redemptions or to increase cash in schemes after the Franklin Templeton news,” said Ajay Manglunia, managing director and head institutional fixed income at JM Financial.
Under TLTRO, banks are required to deploy at least half of the corpus into the secondary market.
The central bank had announced a total of ₹1 trillion under the targeted long-term repo operation scheme.
“Banks with surplus liquidity have already deployed a major portion in primary issues. We witnessed large participation in the secondary market as well,” said Swati Singh, executive director and head, fixed income at Avendus Wealth Management.
According to Gaurav Awasthi, senior partner at IIFL Wealth Management, the secondary market bond purchases by banks is an integral part of the central bank’s efforts to stabilize the credit markets.
“The Reserve Bank wanted to target the credit market and reduce the credit spreads, which is why they had the secondary market component built into the targeted long-term repo operation,” Awasthi added.
However, while secondary trading activity might be up, the action is largely restricted to highly rated and liquid papers such as those rated AAA, as a general risk aversion continues.
“Market is more driven towards risk aversion. Most secondary market trades are in AAA rated (NBFC) non-banking financial company, (PSU) public sector unit bonds and tax-free bonds, besides some top rated issuers,” said Singh of Avendus Wealth Management.
Almost 80% of the secondary market activity is in the AAA-rated space, said a senior executive at a domestic financial services firm which deals in bonds.
“Of course there is risk aversion. If there was a market for lower rated papers, then Franklin Templeton would not have shut down their funds,” he said, requesting anonymity.
Gopika Gopakumar in Mumbai contributed to the story.
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First Published:2 May 2020, 12:23 AM IST
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