RBI's move to take control of YES Bank puts Mutual Funds on the edge

As many as 32 mutual fund schemes have exposure to bank's AT-1 bonds.

The Reserve Bank of India’s (RBI) decision to takeover YES Bank has put mutual funds (MFs) in lurch, which are bracing for sharp mark-to-market hits on their exposure to the additional tier-I (AT-1) bonds of YES Bank. These bonds carry higher risks compared to other debt securities.

As many as 32 MF schemes are exposed to YES Bank debt with total exposure of close to Rs 2,800 crore (as of January 31, 2020 data).

According to industry participants, MFs are expecting rating downgrades and repricing of the bonds given the higher risks linked with the AT-1 bonds.

“Valuation agencies have already taken a markdown of 35 per cent. These bonds carry equity-like characteristics, and may not get treated at par with other types of debt securities,” said a fund manager, requesting anonymity.

Further, AT-1 bonds have some loss-absorption features, which can get triggered if the bank’s capital falls below certain thresholds.

On Thursday night, Nippon India MF marked down its exposure to YES Bank’s AT-1 bonds to zero after RBI’s move.

The fund house in its note pointed out that as per information memorandum (IM) of AT-1 bonds, in case there is reconstitution or amalgamation of bank under section 45 of Banking Regulation Act, the bank will be deemed as non-viable and trigger for write-down or conversion of AT-1 bonds will be activated.

However, the fund house was not yet able to side-pocket the exposure as the option can only be exercised once the security is downgraded to below-investment grade.

On Friday morning, rating agencies were yet to take any action on grading of the bonds and the instrument remained at investment grade of BBB-minus.

Experts say the bank’s decision on Thursday not to exercise its call option on these perpetual bonds can also be considered as a material event by the rating agency and be grounds for a rating action.

10-yr bond yields hit treasury math; moves up about 30 bps since rate pause

Market is waiting for the Budget to get more clarity on numbers, say experts.

Business Standard : The yield on the 10-year government bond has moved up about 30 basis points (bps) since the December 5 rate pause by the Reserve Bank of India (RBI) and, like the central bank, the bond market is also waiting for the Union Budget in February to get more clarity on numbers.

The bond yield closed at 6.80 per cent on Monday, as against 6.47 per cent on December 4.

“The market is expecting more clarity in the upcoming Budget to gauge the fiscal position of the government," said Hemal Doshi, vice-president — treasury at SBI DFHI, a primary dealer.

Till further cues, the 10-year bond yields should remain range-bound within 6.75-6.85 per cent, market participants, including Doshi, said.

B Prasanna, head of global markets and proprietary trading group at ICICI Bank, said the yield movement in the 10-year bonds had been enough for now and it should consolidate around the present level.

However, that would also mean that the 135-bp rate cut since February, which resulted in 137-bp transmission in money market rates and about 87-bp transmission in the 10-year bond yields, has reversed by at least 30 bps.

An elevated yield level also makes borrowing by the government costly, as it would likely hit the market with extra borrowing, unless it cuts its expenditure drastically to balance out low revenue collection from taxes.

At a time of growth slowdown, when the central bank and the government want banks to pass on rates, banks will also have no obligation to cut their rates if the underlying market instrument moves up and small savings certificates continue to offer high interest rates.

“There will be no transmission in lending rate as banks are unlikely to cut deposit rates any further,” said a senior banker, requesting anonymity. The rise in yields would also be a bit uncomfortable for bank treasuries as they were betting on a handsome return on their bond portfolio. As yields rise, prices of bonds fall. However, that doesn’t mean that banks would be incurring losses.

“In a shorter tenure, banks would still be ‘in the money’, whereas for a longer tenure, banks would be somewhat ‘out of money’...Budget 2020

Bond traders on edge over possible stimulus; seek assurance on fiscal goals

The government will make every effort to ensure that the revenue loss from its latest booster won't affect its goal to narrow the fiscal gap to 3.3 per cent of GDP.

Business Standard : India’s drip-feed approach to reviving growth from a six-year low is doing little to lift the pall over the nation’s bond market.

Bond yields have risen in five of the past seven weeks as traders continue to fear that the government, which has avoided big-bang spending, may still resort to big giveaways. And this week’s oil shock has had investors looking for assurances that the administration will stick to a goal of narrowing its fiscal deficit.

“The mood is cautious and has been exacerbated by what happened in the oil market,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “Any hint the deficit is going out of control will take the air out of the market.”

Benchmark yields jumped the most in 16 months in August. Flip-flops over the government’s plans for a $10 billion overseas debt sale added to the pain as the issuance was meant to shift part of a record Rs 7.1 lakh crore of planned borrowings abroad.

“Investors aren’t willing to enhance bets unless there are clear commitments on the fiscal deficit and sovereign bond issuance,” Sharma said.

The government will make every effort to ensure that the revenue loss from its latest booster won’t affect its goal to narrow the fiscal gap to 3.3 per cent of GDP, Finance Minister Nirmala Sitharaman said Saturday while unveiling the third set of measures in four weeks.

She has refrained from announcing large new spending, and has instead given export incentives, tax breaks and eased foreign investment rules in sectors including retail and coal mining.

Still, yields climbed 10 basis points to 6.73 per cent over two days as the surge in oil following the weekend’s strike against Saudi’s oil facilities renewed worries about fiscal deficit. Bonds rose for a second day, with the yield falling 3 basis points at 10:28 a.m. in Mumbai, as oil held its drop from the dramatic spike.

With risk appetite all but exhausted, the government’s fiscal second-half borrowing plan due before month-end will be scrutinized for clues on whether its budget targets would be met.

“The underlying point is that total borrowings -- center, states and state-run companies -- are pretty much exhausting all the resources available locally,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “Market’s risk appetite is tired at this point.”

Modi win kickstarts rupee bond sales as borrowing costs decline to year low

Billionaire Kumar Mangalam Birla's Grasim Industries Ltd. and UltraTech Cement Ltd plan to raise a combined Rs 7.5 billion ($108 million) selling five-year bonds.

After a dull start to the quarter, rupee bond sales by Indian companies are set to revive as borrowing costs have declined to the lowest in a year following Prime Minister Narendra Modi’s landslide election victory.

State-owned NLC India Ltd. priced Rs 14.75 billion of debt Monday -- its first issuance in a decade -- as average yield for 10-year AAA paper fell to 8.31%, the cheapest since last May.

“Yields have come down and corporates waiting to refinance will borrow,” said Sandeep Bagla, associate director at Trust Group in Mumbai. “Issuance will pick up pace as clarity on the regime improves business sentiment.”

JSW Steel Ltd., the nation’s second-biggest producer, plans to raise Rs 70 billion via bonds and State Bank of India, the country’s largest lender, is considering raising as much as Rs 50 billion through notes on Wednesday, according to exchange filings.

Local-currency issuance in the three-month period that began April 1 is about Rs 700 billion, or 25% of the total raised in the March quarter, as companies held off fundraising during the six-week election process that ended May 19.

Corporate bond sales in the year to March 2020 may be between Rs 6.75 trillion to Rs 7 trillion, up from Rs 6.5 trillion a year earlier, according to Care Ratings.

The potential for reforms after Modi’s comprehensive victory is likely to improve the flow of foreign capital to corporates, according to S&P Global Ratings.

That’s good news for India’s credit markets, which have suffered from a crisis of confidence after shock defaults since last year by Infrastructure Leasing & Financial Services Ltd. and a string of downgrades at mortgage lender Dewan Housing Finance Corp and Reliance Capital Ltd.

Business Standard

Bad news for India's bond mkt: Global funds see pain ahead on fiscal woes

Next trigger for bonds will come from the central bank's policy decision on Thursday, when it is expected to change its stance to neutral while keeping rates on hold.

Prime Minister Narendra Modi’s record $100 billion borrowing plan isn’t the only piece of bad news for India’s bond market, some money managers say.

Debt sales could still fail to bridge a forecast deficit as the government’s budget relies on ambitious revenue collections and one-off items that may not materialize, according to OppenheimerFunds Inc. And Europe’s largest asset manager, Amundi SA, says bonds of other Asian nations offer better value.

Modi on Friday handed out $13 billion of measures including payouts for farmers and relief for taxpayers to boost support before elections, moves that will end up widening deficits. That’s bad news for the market that has slumped in five of the past six weeks as foreigners sold 43.6 billion rupees of sovereign debt in January, after paring holdings by 179 billion rupees in 2018.

ALSO READ: Focus on bond market after Interim Budget shows ballooning govt borrowing

“I suspect the slippage, in reality, would be far worse,” said Krishna Memani, head of fixed income at OppenheimerFunds. “It is an election budget and the government has concluded that higher rates is a cost it is willing to bear.”

The yield on the most-traded 2028 bonds surged 13 basis points on Friday -- the most since May -- after the budget documents showed widening in the deficit targets for this fiscal year and the next to 3.4 per cent of gross domestic product. The government had earlier targeted 3.3 per cent for this year and 3.1 per cent for 2019-2020.

“I will observe closely the developments in the next few months on the budget side before I consider increasing Indian local bonds,” said Esther Law, senior investment manager for emerging market debt at Amundi. There’s more value in other Asian markets with better fundamentals and valuations relative to rupee bonds, she said.

Next trigger for bonds will come from the central bank’s policy decision on Thursday, when it is expected to change its stance to neutral while keeping rates on hold. A dovish signal will help the market take a bit of fiscal slippage in its stride, according to BNP Paribas Asset Management.

“Given a dovish central bank and only slightly deteriorating fiscal situation, we expect a slightly negative impact on yields initially,” said Jean-Charles Sambor, deputy head of emerging-market debt at BNP. “Longer term, we think that the bad news is priced in.”

While global funds were net buyers of government debt on budget day, fiscal slippage and political uncertainty mean Indian bonds will compete with other developing markets that have lower economic and political risks, OppenheimerFunds’ Memani said.

“If the Indian government is looking to foreign investors to finance its deficit, there is nothing in the budget that gets them more comfortable,” he said.