DELAY IN ACTION MAY FREEZE BOND MARKET: MFs
The mutual fund industry wants regulatory intervention to normalise disruption in the corporate bond market.
While investors were already nervous with some schemes’ exposure to IL&FS papers, the recent sharp spike in yields of some highly-rated papers has added to their worries.
Aashish Somaiyaa, chief executive officer of Motilal Oswal MF, added that an intervention is needed on an urgent basis. “We are already seeing the spillover effect emerging from the IL&FS issue. It is quite unfortunate that an entity amenable to credible institutional intervention is being allowed to freeze up the entire fixed income markets.”
“We are seeing large market movements and why they are taking place is not entirely clear. Clients, whether institutional or retail, will be concerned. Any regulatory intervention will calm nerves and lower the risk of contagion impact and panic selling,” said Radhika Gupta, chief executive officer, Edelweiss MF.
A top official of a fund house said, “IL&FS is a systematically important institution with State Bank of India and Life Insurance Corporation of India as shareholders. If government agencies dilly-dally on taking action, the liquidity crisis can quickly turn into a credit crisis.”
On Monday, DSP MF officials held a call with investors to allay their concerns and said the selling of Dewan Housing’s debt paper didn’t have much impact on the scheme. However, the officials did express concern over the recent developments in the corporate bond market.
“If a group such as IL&FS, which has such a good parentage, faces this situation, it is a concern,” said officials said, adding that regulatory intervention was needed.
Recently, DSP MF sold some of its debt in Dewan Housing at 11 per cent yield. Fund managers point out this indicates the tightening of liquidity as such papers typically trade between eight and nine per cent.
The mutual fund industry is also worried that if timely intervention doesn’t come through, redemptions could surge. Corporate investors account for more than half the Rs 7.6-trillion debtoriented schemes. Experts say any sharp pull-back from them could trigger heavy redemption pressure for the industry. Investor sentiment on debt schemes was already weak with such plans seeing a net outflow of more than ~500 billion in this fiscal year amid hardening yields.
The downgrade of IL&FS paper from double A plus to junk status in a matter of a few days has already created a panic-like situation among debt fund managers, which is making them take pre-emptive action against possible risks in their portfolios.