Corporate Bond Mart Gets That Jilted Feeling

The corporate bonds market is facing a glut situation owing to lack of investor interest in the papers floated in the primary market.

These were issued at fine spreads of 40-50 basis points over comparable maturity government papers.

Dealers said even though there is an average daily volume of Rs 100-200 crore, this is mainly driven by trading interest of market participants flush with liquidity and not through genuine buying interest.

They said that the corporates such as HDFC, Reliance and Exim Bank had managed to raise funds from the market at very fine spread to the underlying government securities.

These papers are finding no interest in the secondary market as the effective yield differential on these papers work out to be very marginal compared with the risk premium attached to the tenor of the paper.

Retail investors such as pension funds and Central Board of Trustees, which used to be a frequent buyer of corporate papers in the market are hardly seen.

Dealers said that CBT has stopped coming to the market and ceased investment in these papers as it finds it difficult to earn a decent yield differential to the government securities by picking up these papers.

In order to maintain investments so as to ensure a payment of 9 per cent on the funds of Employee Provident Fund Organisations, it is concentrating mainly on the government bonds, said dealers.

They further said that that given the amount of liquidity, the market volume would have grown manifold if the market could witness retail interest for picking up these papers from investment point of view and not purely for trading.

Moreover, the market volume is being generated only through trading in oil and UTI bonds. Besides lack of investor interest, there is no steady supply of good quality papers.

After HDFC tapped the market in mid-June, GAIL is approaching the primary market to mop up around Rs 500 crore.

The bonds with a tenor of 12 years enable the investor the facility of redemption in strips in the eighth year thus making the average tenor of 10 years.

The issue, to be raised through the book building route, may carry a coupon of 5.95-6.30 per cent. The government security of comparable tenor, 9.85 per cent 2015 paper, is one of the briskly traded paper.

The paper ruling at yield to maturity of 5.85 per cent in the secondary market gives a spread of 15-20 basis points on the GAIL paper.

Market dealers are also of the view that with the rates stabilising in the longer tenor, the market is witnessing mostly long tenor papers of 8-12 years.