Dollar bond issuances set to get more expensive as US treasury yields rise

In the last two months, yields on US treasury have risen by 75-100 bps due to which Indian firms will now have to shell out more for raising dollar bonds

The rise in US treasury yields have resulted in making it an expensive affair for Indian companies to raise funds by issue of dollar bonds.

In the last two months, yields on the US treasury have risen by 75-100 basis points, due to which Indian firms will have to shell out more for raising dollar bonds.

According to issue arrangers, it might continue to be expensive for Indian firms in the near term, as US treasury yields might rise further.  

These yields started rising on concerns that the US Federal Reserve might soon start pulling back its bond-buying programme, known as the third round of quantitative easing.

“If Indian issuers are willing to pay a slightly higher pricing premium,in the range of 25-50 basis points, they will be able to raise funds from the international market. During volatility, investors demand a slightly higher premium for their investments,” said an issue arranger.

According to issue arrangers, in 2013, Indian firms raised $10 billion by way of dollar bonds, compared with $8.6 billion raised in 2012. This is because at the start of 2013, US treasury yields were treading low.

The rise in these yields resulted in foreign institutional investors selling domestic bonds, due to which yields in the domestic market also became volatile.

As dollar bonds are becoming expensive, companies are looking at other currency bond issuances. “During such scenarios, people start assessing which market will be more cost efficient,” said an issue arranger.

According to issue arrangers, many companies are now adopting a wait-and-watch approach on hopes that US treasury yields might stabilise. “Those who have an urgency will still go and pay a premium,” said an arranger. The arranger added it was very difficult to say when the cost of borrowings would come down.

“If the market stabilises, corporates will start raising bonds. But if it continues to be this way, then issuances will be lesser going forward,” said the arranger.

Last Friday, the US Federal Reserve downplayed the notion they would bring an imminent end to QE3. But now, the street has prepared itself that it is just a matter of time when the US economy improves and the QE3 pull back begins. That would result in more liquidity squeeze and thus make it more expensive to borrow by way of dollar bonds.