The year 2020 has been a challenging year for investors and economies, it has been good for the asset market. The challenges created by the economy or structural issue have been compensated by the central banks by increasing liquidity and through relief packages. In the past, there has been a debate on the rapid rise in the market, on the rally related to fundamental valuation and liquidity. But it is slightly different in the bond market.
What happened in the last days
- In March 2020, the bond market went into freeze. Even liquid funds gave negative returns for a few days.
- The trading volume in the initial phase of Work from Home has reduced drastically.
- People do have internet at home, but special trading systems are only in the office.
- These things were resolved slowly through VPN etc. but it took some time.
- Banks were not considering bond positions due to uncertainty and nearing the end of the year. They were only parking surplus liquidity with the RBI in reverse repo.
- FIIs / FPIs were selling heavily in March.
- People were waiting for RBI measures. Something (OMO, LTRO) was being done by the RBI, but the market participants had high expectations. During this time, he did not shop.
- Mutual funds faced redemption pressure due to sentiments being negative. People also withdraw money from mutual funds. There was a lot of selling pressure on the market, which caused this problem. Liquid funds saw a March advance-tax related outflow.
- Overnight funds are considered safe, due to which many people invested in them. High demand in the overnight fund or TREPS market led to a drastic reduction in rates, but was still positive. Even during this period, Overnight Fund did not give negative returns.
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RBI measures will come in handy
Gradually, the RBI took some measures, due to which things have improved. The RBI Policy Review was stopped on 27 March. The RBI reduced the repo rate this year. A provision of 1 lakh crore of Targeted Long Term Repo Operations (TLTRO) was made to purchase corporate bonds. It could not be used for government securities. This gave support to the corporate bond market. Banks made purchases with the help of RBI. TLTRO corporate bonds were free of mark-to-market volatility for banks. Till date, the purchase was in better quality bonds (PSU, AAA). But other segments (less than AAA / NBFC) were not getting support. Therefore, on April 17, the next announcement of Rs 50,000 crore TLTRO 2 was made keeping in mind the NBFC and MFI.
Throughout the year, RBI kept the support system operational through rate cut (1.15% reduction in repo rate from February 2020 onwards). At the same time other measures such as reverse repo were further reduced to 3.35%, liquidity measures were taken. Made measures like OMO procurement, OMO on State Development Loans for Government Securities Lending Program. At the same time, the RBI continued to maintain an approachable stance on rates even further and said to support the market.
what next
Yield levels were supported by liquidity in 2020; The 10-year G-Sec yield is currently 6 percent and the 3-month Treasury bill is lower than the reverse repo rate at 3.35 percent. Government borrowing is going to be huge in 2021. As long as there is support from RBI, the market will remain where it is. However, somewhere in the future, RBI will have to think about exit from excessive liquidity in 2021 or thereafter. This will be the turning point for the yield level in the bond market. For debt mutual fund investors, the returns will be more realistic as carry yields (portfolio YTM) decline in 2020.
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