Short-tenor corporate bond yields fall on mutual funds demand, surplus liquidity

This article was originally published on this site

© Provided by The Financial Express Market participants said fund houses were interested in shorter duration debt papers as they had enough idle cash due to lower issuances of longer tenure papers and the absence of state-owned companies in the primary market.

By Manish M. Suvarna

Yields on corporate bonds maturing in less than five years fell in the secondary market because of surplus liquidity in the system and firm demand from mutual funds, dealers said. The fall in yields can also be attributed to lower issuances in the primary market. Yields on three-year corporate bonds fell 10-15 basis points, and five-year bonds saw moderation of 5-7 bps in the secondary market, according to money market dealers.

“The fundamental reason for the fall in yields at the shorter end is huge surplus liquidity in the banking system. Easing yields on G-Sec and low corporate bond issuances also dragged yields lower,” said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Mutual funds have shown good demand for short-term papers due to steady inflows in that segment. For the last two-and-a-half months, fund houses received funds in short-term funds such as liquid funds, low-duration funds, overnight funds, money market funds, etc, owing to record surplus liquidity in the banking system.

The liquidity has increased for a variety of reasons and is expected to rise further due to redemption of treasury bills this quarter and infusion of liquidity through purchase of government securities under the Government Securities Acquisition Programme (G-SAP). Currently, the liquidity in the banking system is expected to be in a surplus of around Rs 7.7 lakh crore.

In order to curb the excess liquidity in the banking system, the central bank has been conducting reverse repo operations for the last six months. The RBI said it would conduct variable rate reverse repo (VRRR) auction till September-end to absorb additional liquidity.

Market participants said fund houses were interested in shorter duration debt papers as they had enough idle cash due to lower issuances of longer tenure papers and the absence of state-owned companies in the primary market.

Meanwhile, easing yields on government securities also allowed yields on corporate bonds to fall in the secondary market. The yield on most traded bonds in the government securities market, 5.63%-2026, fell nearly 10 bps and 5.15%-2025 bonds fell by 7-8 bps since the last week.

Yields on government securities have eased because MFs are expected to be on the buying side and also due to moderation in Brent crude oil prices.

While dealers expect rates to remain range bound in coming days, any further increase in liquidity will put pressure on yields. “If liquidity remains as it is, yields will stay at the current level, but some action on the liquidity front like absorption of liquidity will make things worse,” a dealer with a private bank said.