Decision by govt-run IRFC, NCDC to scrap issue shows bond fatigue is real
Yields across tenures for AAA-rated corporate bonds have risen with short-term tenures showing sharper increase
India’s private sector firms are facing the heat of a surge in sovereign bond yields. Two government-owned firms—Indian Railways Finance Corporation (IRFC) and National Cooperative Development Corporation (NCDC)—cancelled their plans to raise money from the bond market last week because of the 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 states will borrow more than ₹7 trillion, there is little motivation to buy private sector corporate bonds. After all, buying them involves a credit risk.
MORE FROM THIS SECTIONSee All
Also Read | India’s vaccine rollout changes gears
Even so, investors have binged on close to ₹6.3 trillion worth of corporate bonds in April to January of FY21, data from the Securities and Exchange Board of India (Sebi) shows.
View Full Image
However, 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 also risen. The yield on the 10-year benchmark government bond has climbed more than 35 basis points (bps) since January 2021. One basis point is one-hundredth of a percentage point.
TRENDING STORIESSee All
The impact on corporate bonds has been harsher. Yields across tenures for AAA-rated corporate bonds have risen with short-term tenures showing sharper increase. Since January, the yield on three-year corporate bonds has climbed more than 100bps, while that of five-year corporate bonds has risen 70bps, according to data from Bloomberg. Bond investors said they have reason to believe that this rise will not end here.
The sentiment is against bonds globally as inflation fears have come to the fore with the rise in commodity prices. From copper to crude, prices of commodities have risen and with them so have sovereign bond yields. 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 also. The Reserve Bank of India (RBI) is on the path of normalizing liquidity. That means the extent of surplus liquidity will reduce progressively and the price of liquidity is also on the rise.
However, 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 the year-ago levels, because of higher liquidity and targeted measures by the government and the Reserve Bank.
For instance, the three-year corporate bond yield is currently at a spread of around 80bps above the corresponding government bond. This was nearly double at 160bps in the year-ago period.
Prospective issuers of corporate bonds may have to contend with the rise in borrowing costs but there is still time before the cost starts pinching them hard.
Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.