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MUMBAI :
Trading in the corporate bond market saw a surge this week, offering some relief to highly liquid mutual funds facing bailout pressure on their debt funds.
Daily trade volume has exceeded ₹Rs 10 billion in the three days to April 29, 15% more than the average daily turnover in April, according to data from the National Stock Exchange.
On April 28, the value of the bonds ₹Rs 13,762 million was traded, the highest in the month.
The supply side is being driven by mutual funds, trying to raise money by selling bonds as they face massive bailout pressures, especially on their hedge funds after the Franklin Templeton Mutual Fund decided to close six of their debt schemes.
Mint reported on April 29 that panicked investors have almost withdrawn ₹Rs 9 billion of credit risk funds in just three days since the Franklin Templeton fiasco.
Assets under management (AUM) of credit risk funds fell 19% in the three days to April 28, according to data compiled by Pulse Labs, a mutual fund data provider.
That compares to the ₹Rs 5,569 million outflows, or 10% of total assets under management, throughout March, which generally records higher amortizations due to companies’ year-end sales.
Banks full of central bank capital have become big buyers in the secondary market.
“It is the TLTRO (long-term repos) money that is available with banks that is driving volumes in the corporate bond market. Banks are buying papers from the market and other traders. Mutual funds are selling papers for meet repayments or to increase cash in schemes after news from Franklin Templeton, “said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.
According to TLTRO, banks must deploy at least half of the corpus in the secondary market.
The central bank had announced a total of ₹1 trillion under the long-term repos operation scheme.
“Banks with surplus liquidity have already deployed an important part in primary matters. We also witnessed a large secondary market share, “said Swati Singh, CEO and Director of Fixed Income at Avendus Wealth Management.
According to Gaurav Awasthi, a senior partner at IIFL Wealth Management, the purchases of secondary market bonds by banks are an integral part of the central bank’s efforts to stabilize credit markets.
“The Reserve Bank wanted to target the credit market and reduce credit spreads, so they incorporated the secondary market component into the long-term repos operation,” added Awasthi.
However, while secondary trading activity may be on the rise, the stock is largely limited to highly-rated and liquid stocks, such as AAA-rated stocks, as a general risk aversion continues.
“The market is more oriented towards risk aversion. Most of the operations in the secondary market are carried out in bonds of the public sector financial unit (PSU) and tax-exempt bonds of the AAA-rated non-bank financial company (NBFC), in addition to some highly rated issuers “, Singh of Avendus Wealth Management said.
Almost 80% of secondary market activity is in the AAA-rated space, said a senior executive at a national financial services company that trades on bonds.
“Of course there is risk aversion. If there was a market for low-rated papers, then Franklin Templeton would not have closed its funds, “he said, requesting anonymity.
Gopika Gopakumar in Mumbai contributed to the story.
