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Debt market attraction towards PSU Papers and Government Securities here to stay- Tata Mutual Fund

Murthy Nagarajan

Murthy Nagarajan,
Head Fixed Income,Tata Asset Managment

Debt market attraction towards PSU Papers and Government Securities here to stay

By Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund

Investors invest in Debt mutual funds to get stable returns. The return of debt portfolio is broken into two parts, the income which is the coupon/ Yield to maturity (YTM ) of the underlying securities in the portfolio and the price appreciation of securities in the portfolio. Analysing the total returns over a longer time frame , 80 % to 85 % of the returns is generated by YTM of the portfolio and the balance 15 % to 20 % of the returns is generated by capital appreciation. Retail and HNI in the past, have been inclined towards fund house schemes which has higher YTM. YTM is the stable part of the returns of the portfolio. The returns of high-quality portfolio is volatility as the underlying securities are frequently traded.

However, we are seeing a shift from credit funds to good quality portfolio from the retail and HNI side in the current financial year. Lower GDP growth and high leverage of Indian companies has led to credit quality deteriorate and security prices moving down/ mark down in the portfolio. This has ensured the returns of high yielding portfolios have not matched the YTM of the portfolio.

Government securities and AAA PSU yields has come down due to RBI cutting repo and reverse repo rates by 225 basis points and 265 basis points in the last one year. RBI has been conducting Open Market Operations, switches in Government securities to bring down yields. High Quality corporate bond paper yields have also come down due to unconventional measures taken by RBI like Target Long Term Repo Operations. RBI has infused around Rs 8 Lakhs crores of liquidity in the system which has compelled the banks to invest in the absence of credit offtake.

AA and below rated papers of reputed companies, yields have not fallen. They are trading in the band of 8.50 % to 9 % levels in the 3-year segment. This is giving a spread of 400 basis points over G sec of similar maturity. These are one of the highest spreads which is available in good reputed AA names since 2013.

Why then are the fund manager not buying in these papers given low default risk probability of reputed companies?. Credit rating agencies have upgrade to downgrade ratio of 1 :10 in value terms for the current financial year. Given the demand destruction, there is expectation of more than one downgrades in many of these companies. Fund managers don’t want to trade their liquidity for higher YTM, in these uncertain times.

The government is not inclined to spend its way out of this problem as most countries have done to tackle covid related disruptions in their economy. The total fiscal deficit of state and centre should be around 80 % of GDP in 2021 from 69 % in 2020. The Government seems to be worried about the Global rating agencies downgrading the country ratings taking it to non-investment grade. This could make Indian companies access to the capital markets a problem. This will also increase the risk premium which the investors will demand to invest in this country.

The downturn in GDP growth is expected to be longer in India compared with other countries. Indian Economy may take more than 3 years to recover fully to pre covid levels. The reform package announced by the government will take time as the private sector, consumers deleverage the balance sheet. RBI will be expected to do a lot from the monetary policy side to take care of deficient demand conditions in the economy.

We may be heading for low rates in the economy for long period of time as the consumers hold back their purchases and producers hold back their investments due to uncertainty of the evolving situation. Banks and other intermediators like insurance, mutual fund are flushed with deposits/ Inflows due to lack of investment opportunities. Given the risk averse environment, they will plough back the money to the Government and AAA PSU even though the yields on these instruments have come down below historical standards.
RBI is expected to support this segment of the market as they are the largest borrowers and their spending has the highest multiplier effect on the economy.

Disclaimer : The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

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