Home >News >India >Mutual funds sell perpetual bonds of banks

MUMBAI: Facing redemption pressure after Franklin Templeton India closed six debt schemes, mutual funds houses have been liquidating their holdings in perpetual bonds issued by banks. The sell-off has sent yields on these paper surging.

Mutual funds were seen dumping additional tier 1 bonds of public sector banks in the secondary market at steep discounts. Perpetual bonds issued by Union Bank of India, Canara Bank and Bank of Baroda were sold in the range of 11.50-14%, nearly 100-350 basis points above their coupon, said market participants. These bonds carry a call option at the end of 2021-22.

“Corporate bond market is illiquid. When mutual funds come to redeem, they have to sell the bond papers. Whatever bid was available, they sold it at that rate. Credit funds are seeing outflows. Whatever papers are getting liquidated, it is sold," said Lakshmi Iyer, chief investment officer (debt) & head products, Kotak Mahindra AMC.

On Monday, the Reserve Bank of India announced a special liquidity facility of 50,000 crore rupees for mutual funds. Under this, banks can access funds from the central bank which will conduct repo operations of at least 90 days at the repo rate.

Banks have borrowed 2,000 crore under the special liquidity window for mutual funds as on 27 April, according to data from the RBI.

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