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Home >Markets >Mark To Market >Borrowing costs on the rise again as low bond yields begin climbing

If the resurgence in coronavirus infections is giving a sense of déjà vu, the same is the story with the yield curve in the bond market. Notwithstanding unprecedented policy measures of the past one year, funding costs for companies have begun to increase once more.

Corporate bond yields have risen across the curve, the fallout of hardening government bond yields and an increase in risk perception.

An analysis by CARE Ratings Ltd shows that the biggest rise was seen for housing finance companies.

In March, the average cost of borrowing from the bond market for these companies rose by as much as 1.25 percentage points from the previous month. In fact, for some companies, the cost of borrowing has surpassed that of pre-pandemic level.

Getting dearer
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Getting dearer

“The cost of borrowings for corporate bonds has declined from 8.02% in March 2020 to 7.18% in March 2021. However, the uptick seen in the last 2 months have limited the overall decline during the year FY21," said a CARE Ratings note.

Does this mean that the Reserve Bank of India’s (RBI) liquidity measures didn’t work? The answer is yes and no.

The liquidity surplus ensured there is no disruption to the flow of funds during the pandemic in FY21. To be sure, bond yields for top-rated and large companies are still far lower than they were a year ago.

But the recent steady climb should have companies worried.

One reason is that yields may not ease from here on. Sure, the RBI’s announcement to buy government bonds has brought down yields and that may have a salutary effect on corporate bond yields. But this impact is likely to be fleeting.

Corporate bond yields reflect the interest rate outlook and the underlying risk of the issuer.

This yield curve may swing upwards, thanks to two other curves—the coronavirus infection curve and the inflation curve.

Resurgence of the pandemic has heightened fears of lockdowns, which may impact businesses.

Meanwhile, inflationary pressures have also increased, which means that the odds of bond yields easing again are low.

Short-term yields rose more since the central bank wants the curve to flatten.

Commercial paper rates have begun to rise as well. So far, the rise in bond yields is not likely to impact the net interest margins for non-banking financial companies (NBFCs), according to analysts.

However, if this persists, lenders may soon find margins coming under pressure. For other top-rated borrowers as well, decade-low yields are a thing of the past.

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