RBI’s TLTRO bazooka leads to significant drop in yields across debt market segments

By: |
Published: March 28, 2020 6:15:01 AM

Meanwhile, the benchmark yield fell by 8 basis points to close at about two-week low of 6.14%. During the day, the benchmark yield moved below the 6% mark before closing the session higher.

The liquidity availed under the scheme by banks will have to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020, RBI said.The liquidity availed under the scheme by banks will have to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020, RBI said.

Yields across various debt market segments, including corporate bonds, commercial papers (CPs) and certificates of deposits (CDs) fell by 150-280 basis points on Friday after RBI announced targeted long-term repo operations (TLTROs) through which banks can borrow short-term money from the central bank at a floating rate linked to the policy repo rate and deploy them in debt market instruments.

The central bank said it would conduct auctions of TLTROs of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore. The liquidity availed under the scheme by banks will have to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020, RBI said.

As a result, a deeply frozen bond and money markets sprung to life on Friday with short-term money market rates in the investment-grade segment falling as much as 280 basis points while corporate bond yields fell by 120-150 bps.

Dealers told FE that CPs of Nabard maturing in June that were dealt at 7.70% on Thursday were dealt at 5.15% on Friday. Bank of Baroda CDs with early June maturity that were dealt at around 7.60% on Thursday saw their rates fall to 4.88% on Friday, following the announcement. Similar reaction was seen in the corporate bond yields as well.

Ashish Jalan, assistant V-P at SPA Securities, told FE that buyers have started to emerge in the corporate bond market that has been witnessing huge liquidity problems in recent times. “REC bonds maturing in 2022 was dealt at around 8.35% on Thursday in the secondary market. On Friday, it got dealt at 6.80% – seeing a drop of around 150 basis points. We have seen MFs in the corporate bond market since the second half on Thursday. With Friday’s announcement, some nationalised banks have also entered the market. I believe more of these TLTROs have to be done to bring stability,” Jalan said.

Under the terms of the TLTROs, banks would be required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market, including from MFs and NBFCs. Investments made by banks under this facility will be classified as ‘held to maturity’ (HTM) even in excess of 25% of total investment permitted to be included in the HTM portfolio. Exposures under this facility will also not be reckoned under the large exposure framework, RBI indicated. The first of the TLTROs were conducted on Friday where RBI received bids worth Rs 60,500 crore against a notified amount of Rs 25,000 crore.

Meanwhile, the benchmark yield fell by 8 basis points to close at about two-week low of 6.14%. During the day, the benchmark yield moved below the 6% mark before closing the session higher.

Rahul Bajoria, chief India economist at Barclays, stated in a report that while several steps they had envisaged have materialised, RBI has stopped short of directly indicating any intention to buy bonds or provide lines of support to the government. “However, we believe these may still be required. As such, depending on the total quantum of additional fiscal measures that may be announced for corporates, we believe RBI may have to ultimately provide the government with either liquidity lines or outright purchase of government securities, depending on the how the situation evolves,” Bajoria said.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1CreditAccess Grameen rating: ‘Buy’; AuM growth in quarter was strong
2United Spirits rating: ‘Neutral’; Performance was below par in Q4FY20
3Liquidity continues to drive up markets, benchmarks gain 6% in a week