IRFC, NCDC issue scrap shows bond fatigue is real
- In a year when the sovereign will borrow an unprecedented ₹12.8 trillion and the states will borrow over ₹7 trillion, there is little motivation to buy private sector corporate bonds
India’s private sector firms are facing the heat of the surge in sovereign bond yields. Two government-owned companies -- Indian Railways Finance Corporation and National Cooperative Development Corporation-- had to cancel their plans to raise money from the bond market this week because of lack of demand. Their private sector peers would find it tougher to get willing buyers.
In a year when the sovereign will borrow an unprecedented ₹12.8 trillion and the states will borrow over ₹7 trillion, there is little motivation to buy private sector corporate bonds. After all, they involve a credit risk too. Even so, investors have binged on close to ₹6.3 trillion worth of corporate bonds in April-January of FY21, data from the Securities and Exchange Board of India (SEBI) shows.
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But the going is tough for companies because yields are now on the rise. Investors want to be compensated to continue to buy corporate paper through an increase in yields. They are not wrong because government bond yields have risen too. The yield on the 10-year benchmark government bond has climbed over 35 basis points since January this year. One basis point is one-hundredth of a percentage point.
The impact on corporate bonds has been harsher. Yields across tenures for AAA-rated corporate bonds have risen with short-term tenures showing a sharper increase. Since January, the yield on 3-year corporate bond has climbed over 100 basis points while that on the 5-year corporate bond has risen 70 bps, according to data from Bloomberg. Bond investors believe that this rise won’t end here and they have reason to do so.
The sentiment is against bonds globally as inflation fears have come to the fore with rise in commodity prices. From copper to crude, prices of commodities have risen and so have sovereign bond yields with them. US treasury yields are near their one-year highs and those in European countries are coming out of negative territory. With governments finding their cost of borrowing increase, the private sector cannot hope for cheap funds. For Indian companies, there is trouble back home too. The Reserve Bank of India (RBI) is on the path of normalising liquidity. That means the extent of surplus liquidity would reduce progressively and the price of liquidity is also on the rise.
But there is a silver lining here. Even with the recent rise in yields, the private sector would still enjoy spreads that are far lower than their year ago levels. For instance, the 3-year corporate bond yield is currently at a spread of around 80 bps above the corresponding government bond. This was nearly double at 160 bps a year ago.
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