Corporate bond yields seen rising
Corporates will find it costlier to raise funds through bond issues. Waning investor appetite due to an oversupply of bonds coupled with redemption pressure on MFs who are big investors may force corporates to offer higher rates.
By Preeti R Iyer, TNN |
MUMBAI: Corporates will find it costlier to raise funds through bond issues. Waning investor appetite due to an oversupply of bonds coupled with redemption pressure on MFs who are big investors may force corporates to offer higher rates. Corporates are also being crowded out by a series of debt issues by banks.
Yields on corporate bond issuances, which have remained unchanged for the time being, are likely to rise within a short term on account of an oversupply of issues, appetite slowdown and redemption pressures on MF houses.
There are a host of factors at play, which would push up yields on corporate bonds in the near term. For starter, even as government bond yields have seen a downward movement over the past couple of weeks, yields on corporate bonds have remained stable over the same period.
The yield on the benchmark 7.59% 2016 paper has fallen from 8.43% in early part of July to 7.58% in the first week of October. However, fall in yields of government securities has pushed up the differentials between corporate bonds and gilts to more than 100 basis points (BPs).
On an average, the yield differential between a AAA-rated 5-year corporate bond and a government bond with the same maturity lies between 60 bps and 70 bps. RVS Sridhar, UTI Bank’s vice-president (treasury) pointed out that sell-off in corporate bonds is more likely in securities with near-term maturities and for newer issuances.
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Within the banking sector, most players are shoring up their capital requirements due to the nearing of the Basel-II deadline. Hence, to enhance the acceptability of bond issuances, the issuers need to sweeten the pie which means that yields will be on the uptick, said Pradeep Madhav, chief operating officer, Securities Trading Corporation of India.According to treasury officials, there has been a clear case of oversupply of corporate bonds. There has been a spate of issues by banks who are raising capital through Tier-I and Tier-II issues. With the commencement of the second half of the financial year, many players in the market reposition their holdings in MFs, causing a rise in redemptions.
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