Mumbai: The momentum of corporate bond issues is seen slowing as yields rose and concerns of a higher-than-expected government borrowing turned sentiment cautious, merchant bankers say.
“Fresh issues are unlikely at these levels as most corporates will go in for shorter-term borrowing” like commercial paper, which is cheaper, a senior banker said.
The average yield on 1-year commercial paper is about 7.75-8.0% now, while 5-year bond yields are at 8.8%, and 10-year yields above 9%.
In January, the government said it would issue Rs500 billion of fresh bonds until the end of the current fiscal year, fuelling worries it may crowd out corporate sales.
“A higher government borrowing programme will push up the yield on the 10-year corporate bond by about 8-10 basis points (bps),” thereby making borrowing more expensive, said an official from a broking house.
In the corporate bond market, focus has shifted to special bonds issued by the government to oil, fertilizer and food companies for selling products at subsidised rates.
Demand for these bonds is mostly from long-term investors like insurance firms and pension funds.
“Compared with government securities, we are getting a spread of about 125-130 bps, which is very attractive,” said an official from an insurance company.
“The secondary corporate bond market will mostly track government bonds in the near-term, but with fresh federal bonds being issued, activity on the corporate bond front is subdued,” a trader said.
At 3.16pm, the yield on the 2018 government bond was at 6.14%, lower than Friday’s close of 6.17%, taking comfort from absence of a government bond auction announcement this week.
The benchmark yield had risen 92 bps in January mainly due to supply concerns after falling 254 basis points in 2008.
The spread between the 5-year corporate and government bond yields was at 279.53 bps, higher than 272.83 bps the prior week.