Dollar bonds to lose some lustre as US yields surge

Mumbai: Overseas bond sales, which bankers believe appear to be on course for an annual record, could moderate after the US Federal Reserve's first rate increase in three years expectedly inflates debt-raising costs for Indian companies.

Bank of Maharashtra priced its debut, five-year bond raising $500 million Thursday at 130 basis points above the five-year US treasury. With the five-year US treasury at 4.80%, the bonds are likely to be priced around 6.10%.

This is a big difference from August 24, when Union Bank of India raised $300 million by selling five-year bonds at 102 basis points above the five-year benchmark security. Back then, the instrument was trading around 4.39%, making a final yield of 5.41% on the bond.


So far this year, dollar bond issuances from India have crossed $20 billion, mainly on the back of the concessional swap windows opened by the Reserve Bank of India (RBI) to support leverage programmes for foreign currency deposits.

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To be sure, bankers still expect the total funds raised this year from overseas to top the record $22 billion garnered in 2021.

However, the recent surge in US yields could change the math for issuers. "At these higher treasury levels, there could be some moderation in issuance activity, especially from issuers who are fixed-rate borrowers and who have access to onshore rupee liquidity, as dollar bonds on a post-swap basis may not be as attractive from a pricing standpoint as straight rupee financing," said Vinod Venkatesh, co-head of financing solutions, HSBC India.

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Benchmark US treasuries have risen sharply in the last month in anticipation of a Fed hike, which was delivered on Wednesday.

Yield on the benchmark 10-year US Treasury has increased beyond 5% for the first time in 19 years while the five-year bond was trading around 4.80% - the highest in more than three years as traders priced in higher interest rates.

"The all-in cost for issuers has definitely gone up, but that is not all. Issuers will also look at the outlook for the market. The fact is that one big uncertainty is off the table with the US Fed hike," said a senior capital market executive at a foreign bank. "Issuers who need funds may now like to frontload and take the risk of fundraising off the table because going forward, no one can predict how high rates can go."

Bankers say that Indian issuers will still look at the spread over the US treasuries and weigh in future risks while deciding on issuances. Venkatesh from HSBC said his bank does not expect activity to stop completely.