PFs buy negative AAA corporate paper

Provident funds (PFs) are picking up AAA-rated corporate debt paper even as these are being quoted at a negative spread to government paper of similar maturity.

These are the PF trusts, which have de-risked their investment portfolios and are today buying only AAA-rated debt.

The idea is to get as close to the 8.5 per cent administered rate of return forced onto PFs and meet the stipulated 30 per cent investment in PSU bonds, said Amit Gopal, senior vice president India Life.

Power Finance Corporation was quoting at a yield of 7.1 per cent in the secondary market. This works out to a negative spread of about 25 basis points against similar maturity of government paper "" 8.35 per cent Government of India 2022 paper "" ruling at 7.35 per cent.

Likewise, the yield on Power Grid Corporation is quoting at 6.7 per cent against similar maturity 12.32 per cent GoI 2011 ruling at 7.04 per cent.

Select PFs are buying more government securities as compared to bonds in the current quarter as yields on the benchmark 10-year paper peaked to a high of 6.9 per cent. Some PFs have also bought 7.5 per cent GoI 2034 at yields of 7.4 per cent.

Many PF trusts are picking up government securities from the market, though normally government paper is bought at the end of year, after PFs have finished their investment quotas for public sector bonds.

"In current market conditions, with the huge rise in government security yields over the last couple of weeks, we had advised our funds and clients to buy long-dated government paper" said Baman K Mehta, CEO, Darashaw, a leading fund manager for PFs and treasuries.

Meanwhile, PF trusts of multinational companies had during the bull run in the bond market cleaned up their portfolio by selling the "junk" papers.

Though PFs are not allowed to trade in the securities acquired, if these papers are subsequently rated below investment grade, the same can be sold off, as per the investment norms laid down by the Regional Provident Fund Commissioner (RPFC). As such many MNC trusts sold their holding of Maharashtra paper among others.

"Sixty to 70 per cent of the investment of PFs managed by us have invested in AAA-rated paper and sovereign debt," said Gopal. Depending upon the age of the portfolio, the return is as high as 7.5-8.5 per cent, he added.

Banks selling their long-term paper have ensured themselves against any loss.

"In the current market conditions, in line with demand exceeding supply, one cannot expect 30-year paper to be trading like short term treasury bills," said a PF trustee. This is as banks do not wish to book huge losses on their long-term portfolios.