Corporate bond street still dry, as yields trading high

The falling rupee has not only impacted bond yields but also issuance of corporate bonds

Since the time the Reserve Bank of India (RBI) tightened liquidity in mid-July, these have dried up as the cost of borrowing rose. Issue arrangers are not expecting primary issuances of corporate bonds to pick up unless liquidity  improves.

The yield on the 10-year AAA-rated public sector unit corporate bond was 8.52 per cent on July 1 and is now at 9.65 per cent. On July 15, RBI had announced a first round of liquidity tightening to arrest the depreciating rupee, due to which the yield had breached nine per cent, reaching 9.33 per cent the next day.

“Corporate bond yields are still high and liquidity in the system is tight. In such a scenario, investors are in the process of selling their investments in corporate bonds, due to which there is excess supply. Due to all these factors, we are not seeing primary issuances of corporate bonds through the private placement route,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

Only tax-free bond issuances are expected to garner investors’ interest. “These are an attractive investment because the issuers are all highly rated corporates. Besides, for corporates paying high tax, investing in these bonds makes sense because they are tax-free,” said Manglunia.

Data from the Securities and Exchange Board of India  shows companies had raised Rs 110,785 crore through public placement of corporate bonds in April-June, the first three months of the financial year.

“The liquidity scenario has to improve for primary issuances to hit the market. Besides, there is no clarity on interest rates,” said Ramesh Kumar, senior vice-president (debt), Asit C Mehta Investment Interrmediates.

Though RBI announced a partial relaxation in its tight money policy last week, bond yields continue to be high. “Through the liquidity and interest rate tightening measures, we have ended up closely linking various segments of financial markets, namely, the money market, equity market, bond market and currency market. The various segments are feeding on each other. Volatility in one market influences the other and in turn impacts the third and so on,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.