Era of Corona : Early Signs of Improvement
Infyture, Investment For Your Future
The previous few weeks saw a significant rise in the volatility in bond yields and a few debt fund categories, especially credit risk funds. Apprehensions of credit downgrades due to lockdown had resulted in widening credit spreads. Further, the decision of a large mutual fund house to wind down some of its debt schemes had resulted in accelerated redemptions in credit space.
The Reserve Bank of India (RBI), in response, has been very proactive in response to the crisis. It has already announced measures worth Rs. 6.24 lakh crore, which amount the approximately 3.1% of GDP. However, due to this heightened risk perception, banks have not been keen on subscribing to some of the facilities which involved investing in lower rated papers or those issued by Non-Banking Financial Institutions (NBFCs), Housing Finance Companies (HFCs) and Micro-Finance Institutions (MFIs) (such as TLTRO 2.0).
Therefore, the Government announced a Rs. 30,000 crore special liquidity scheme for NBFCs/ HFCs/ MFIs, under which investments made in both the primary and secondary markets will be fully guaranteed by the Government. It also announced a Rs. 45,000 Partial Credit Guarantee Scheme 2.0 (PCGS 2.0). Under this scheme, the existing PCGS has been extended to cover primary issuances of bonds by NBFCs/ HFCs/ MFIs rated AA and below, including unrated papers. These measures are expected to increase liquidity in the markets for NBFCs/ HFCs/ MFIs, and also encourage further participation of banks in Targeted Long Term Repo Operations 2.0 (TLTRO 2.0) announced for these entities.
All these measures, in addition to several other measures that the Central Government continues to announce (such as the 100% government guarantee for new loans extended to MSMEs worth Rs. 3 lakh crore) have begun to show early signs of improvement. The dust has begun to settle, and this can be felt by observing market yields. Yields on savings products like bank/AAA corporate FDs have fallen, and so have the yields and spreads of corporate bonds. For example, AA 3 year yields have fallen by approximately 0.57% since March 31, 2020. Additionally, redemptions from credit risk funds have moderated significantly.
As both the Central Government and the RBI have announced measures with a strong sense of urgency and purpose, yields spreads may start compressing in the coming weeks as liquidity issues in the debt markets begin to clear out. Therefore, this presents a good opportunity to invest in debt markets.
Sources:
Various publications
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