Market experts said that foreign investors utilised the rally in the G-sec market to book profits and withdraw funds at a time when the risk-off sentiment is ruling the markets.
General category foreign portfolio investors (FPIs) have sold over $5 billion worth of central government securities in a month while foreign investors sold just $1.29 billion worth of corporate bonds in the same period, according to data by NSDL and CCIL.
Market experts said that foreign investors utilised the rally in the G-sec market to book profits and withdraw funds at a time when the risk-off sentiment is ruling the markets. However, widening of spreads in the corporate bond market to the tune of 50-60 basis points and lack of liquidity could have dampened the possibilities for FPIs to exit their positions, dealers say. It is also noteworthy that some FPIs invest in these corporate bonds till maturity and hence may not be willing to sell despite a sluggish environment.
Ajay Manglunia, MD & head of institutional fixed income at JM Financial, said that the impact cost of selling could also have been one of the factors due to which FPIs are still holding on to the corporate bonds. Impact cost refers to the price by which a security moves when a large quantum is sold when there is not enough demand for the same. An illiquid corporate bond market comes with a relatively higher impact cost compared to the highly liquid G-secs market. In the current environment, where secondary transactions have also taken a hit, the impact cost has risen significantly, said dealers.
Impact cost today is unusual as their is a shortage of trading desk staff and most potential buyers are conserving cash to meet any unseen eventualities in future due to fear of virus spread in coming days,” Manglunia said, adding that in these times, the impact cost is as high as 50-100 basis points.
As on March 17, FPIs hold over $24 billion of Indian corporate bonds while general category FPIs hold $20.35 billion of G-secs.
MS Gopikrishnan, independent market expert, pointed out that a large FPI has been exiting its G-secs positions in recent weeks and its effect is getting reflected on the FPI sales number. “It seems a large FPI that holds predominantly G-secs in its Indian portfolio has been continuously selling over last few days. It is estimated that the FPI could have sold about $4-4.5 billion worth of bonds over last week, which is reflecting in the FPI G-secs data. Corporate bond spreads have widened in recent times and liquidity has dried up,” he said.
Market participants also pointed out that yields have gone up by 40-60 basis points in the corporate bonds as well as the commercial paper market.
Siddharth Chaudhary, senior fund manager-fixed income at Sundaram Mutual Fund, told FE that spreads of AAA-bonds have widened by 40-100 bps across maturities in last couple of weeks. “A risk-off sentiment across asset classes due to Covid-19 related risk has led to a selling pressure from market participants like mutual funds/FPIs among others in AAA-category bonds. This has led to widening of spreads of these AAA-category bonds by 40-100 bps across maturities in last couple of weeks. The 10-year bond of Nabard was placed at 7.54% annualised yield-to-maturity on Wednesday, which is higher by around 50 bps from the last placement two weeks back,” he said.