High yields push investors away from corporate bonds

Though OMO purchases may see yields on government bonds falling, corporate bonds unlikely to see a major impact

The corporate bond market is becoming unattractive for investors, owing to high yields. Big investors, including fund houses, insurers and banks, are exiting investments in this space and investing more in government bonds.

Bond prices and yields have an inverse relation. The yield on the 10-year ‘AAA’ rated public sector undertaking corporate bond has risen to 9.9 per cent from 9.58 per cent at the beginning of this quarter, while the yield on the five-year bond rose from 9.44 per cent to 9.93 per cent. Though yields on government bonds may drop from current levels due to open market operation (OMO) purchase of government bonds next week, the impact on corporate bonds may not be much.

Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund, said, “Investors are selling their holdings because yields are rising. They are resorting to selling corporate bonds because the relative value is going down. There will be more of sellers in corporate bonds compared to government bonds after Wednesday’s OMO announcement by the Reserve Bank of India (RBI).”

On Wednesday, RBI Governor Raghuram Rajan said the central bank would conduct an OMO on Monday for a notified amount of Rs 8,000 crore to ease the temporary strain on liquidity. Following government bond auctions every week in November for a notified amount of Rs 15,000 crore (the overall auction size for the month was Rs 75,000 crore), government bond dealers have been waiting for an OMO.

Investors prefer government bonds, as these are more liquid compared to corporate bonds.

An issue arranger of corporate bonds said the appetite for these was low, as yields continued to remain high. Also, it is feared a few firms may be downgraded, amid the slowing economy.

Insurance companies say there is a dearth of corporate bond issuances, and this has necessitated investments in government securities. Badrish Kulhalli, fixed income fund manager, HDFC Life Insurance, said sales of corporate bonds were aimed at rebalancing portfolios. “They are not reducing positions,” he said, adding because of the high cost of borrowing from the bond market, companies, too, preferred to borrow from banks.

Market players said investors were concerned bond issuers would be downgraded by rating agencies. Kulhalli, however, said these concerns were primarily related to issuances rated below top-notch ones. Here, too, the number of issuances was very low, about one-two a quarter, he said.

With yields rising, this number is expected to fall further.
NO LONGER A DRAW

• The yield on the 10-year ‘AAA’ rated PSU corporate bond has risen to 9.9% from 9.58% at the beginning of this quarter
• Insurance firms say there is a dearth of corporate bond issuances, and this has necessitated investments in govt securities
• RBI would conduct an OMO on Monday for a notified amount of Rs 8,000 crore to ease the temporary strain on liquidity