Companies expect rates to fall in the long run

The spreads on the ‘AAA’ rated three-year corporate bonds over government securities of a similar tenure are at a two-year high. This indicates high demand for short-term debt as companies feel interest rates will fall in the long run.

According to Bloomberg data, the spreads have touched 179 basis points, the highest since June 2009. The spreads in case of three-year ‘AA+’ rated corporate bonds are 290 basis points.

Yields on government securities rose after the Reserve Bank of India increased policy rates by 50 basis points on May 3.

While the spreads between 10-year gilts and corporate bonds have contracted to 86 basis points from 94 basis points a week ago, the spreads on the shorter-term papers have widened.

This means companies are willing to borrow at high interest rates for shorter tenures and wait for long-term rates to fall. Thursday, the yield on the 10-year benchmark 7.80 per cent government bond touched 8.30 per cent in early trade before settling at 8.26 per cent.

The treasury head of a public sector bank says as interest rates rise, the tenure of issuances tends to get shorter. “Until inflation and inflationary expectations subside, interest rates in the bond market will remain high,” said the official.

Inflationary pressures are not allowing short-term rates to fall.

“Chances of interest rates coming down are low now as there is a possibility of further rate increases if inflation does not come under control,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. Expectations are that rates will not sustain at high levels for 10-year or 15-year debt issuances and, hence, people are preferring short-term debt, he says.

The interest rates on short-term debt instruments like commercial papers (CPs) continue to be high with non-banking financial companies issuing CPs for three months at 10 per cent.

“CP issuances may see an uptick till they remain lower than the base rates of banks. But long-term issuances in the first quarter are likely to be subdued as rates are high compared to 8.5-8.7 per cent last year,” said Edelweiss’ Manglunia.