Industry participants say the spike in yields can be attributed to selling by foreign institutional investors in the shorter-term bond market.
“We have advised institutional investors in our liquid schemes not to panic. And also suggested them to shift their investments to overnight schemes to mitigate the impact of liquidity tightening in the shorter-tenure market,” said a fund manager.
Industry experts said the one-day negative returns in liquid schemes came in as the new norms laid down by the Securities and Exchange Board of India (Sebi) required valuations of shorter-term papers to be close to the market price, rather than relying on amortisation.
Last year, the market regulator reduced the threshold for mark-to-market valuation from over 60-day maturity to over 30-day maturity.
However, experts expect liquid schemes to see more volatility from next financial year.
“We could see more days of deeper negative returns in liquid schemes as the new Sebi norms say that from April 1, debt papers across maturities will have to be marked to market,” said another fund manager.
Further, some fund houses have told investors that yields could moderate with the Reserve Bank of India (RBI) expected to cut rates.
“Investors entering current yields in liquid schemes could make quick gains as hardening of yields is expected to reverse,” the fund manager said.
The RBI has decided to purchase Rs 10,000 crore of shorter-term debt papers, with the aim of curbing the spike in yields in corporate bonds and the CP market through this liquidity infusion.
According to estimates, FIIs have sold $1.29 billion worth of corporate bonds over the last month.