Fixed Income Opportunities in turbulent times

The current situation is extraordinary, not only from investment perspective but also from an individual’s life perspective. This situation is triggered by the economic uncertainties caused by COVID-19 pandemic. This ‘black swan’ event has caused dislocation in different asset classes, which prompted various policymakers across the globe to respond in unison and Indian government was no exception. It imposed a three-week national lockdown with effect from March 24, 2020 along with a relief package of to the tune of Rs 1.7 lakh crore. Apex bank of India, RBI also acted in tandem and preponed its MPC meeting and also, cut key policy rates by 75 basis points (bps) to 4.4 per cent. RBI also announced measures to inject liquidity of Rs 3.7 lakh crore in the system along with a cut in CRR. Besides, it has also announced other host of measures for the smooth functioning of the financial system.

Fixed Income Opportunities

These measures will help to infuse liquidity in the banking system, improve monetary transmission and credit flow as well as ease financial stress. Besides, it will also help to de-freeze the corporate bonds and the commercial paper (CP) market. This has made debt as an attractive investment opportunity for the next few months with an expected return of around seven to eight per cent. The equity market is already going through one of the most turbulent times but the return looks decent. The month of March also gives you an additional indexation if you have a three-year investment horizon.

Corporate bond yields had hardened significantly in the last few days mainly, due to the demand for cash amid lockdown, clubbed with financial year-end pressure. With this, the corporate bond spreads have widened and are currently, trading above their long-term averages. This is also because of the current stress in the credit market, potential downgrades and defaults amid the slowdown. This has resulted in short-term money market instruments with the highest credit quality trading at a spread of more than 300 bps over the current repo rate.

Now, as RBI has directed banks on the utilisation of monies raised through targeted long-term repo operations (TLTRO) and asked them to deploy in purchasing investment-grade corporate bonds, commercial paper and non-convertible debentures; yields are likely to get softened. Banks shall be required to acquire up to fifty per cent of their incremental holdings of eligible instruments from primary market issuances and the remaining fifty per cent from the secondary market, including mutual funds and non-banking finance companies.

All these will result in normalisation of the yield spreads across the credit spectrum going ahead, presenting good opportunities into the following type of funds:

Money market funds with higher yield and at least, 75 per cent of the corpus is invested into AAA-rated bonds. It’s suitable for investors looking to invest for less than a year.

Banking and PSU debt fund, which invests in a diversified portfolio of debt instruments issued by banks, public sector undertakings, public financial institutions and municipal authorities. This is suited for investors looking to invest for more than three years to five years.

Corporate debt fund invests in a diversified portfolio of corporate bonds, predominantly high credit quality. It is suitable for someone interested in investing between one to three years.

The following table will give you a glimpse of some important parameters of debt funds: