Outlook : Coporate Bonds

All eyes on policy pronouncements

The RBI, in the mid-term review of the monetary and credit policy, which is slated to be announced on October 29, will determine the direction in corporate bonds this week.

Last week yields on best-rated corporate bonds in the secondary market hardened by 8-10 basis points as players were gripped by uncertainty as to whether there will be a cut in the repo and/or bank rate.

The perception in the market is that the yields will see a 10-15 basis points movement depending on whether the RBI effects a cut in the repo and/or bank rate.

Two weeks back the spreads on AAA-rated five-year corporate papers, at 60-65 basis points over the corresponding five-year government security, looked unsustainable.

Last week, the quirk got corrected and spreads widened to 70-75 basis points. Yield on the AAA Indian Railway Finance Corporation (IRFC) bond, which early last week was quoted at 7.04 per cent, rose to 7.15 per cent and was last quoted at 7.12 per cent.

On the other hand, yield on the AA+ issue of ACC was steady at 7.25 per cent. The zero-per cent paper of Panatone, which is maturing in February 2003, saw good action last week as mutual funds bid for it aggressively. Yield on this paper came down by 10 basis points from 6.70 per cent to 6.60 per cent.

New issues

The IRFC will hit the market with a Rs 500 crore bond issue. The issue has two options: a Rs 200 crore, 10-year STRIPS (separately traded registered interest and principal security) issue carrying an aggressive coupon of 6.96 per cent and a Rs 300 crore, 15-year STRIPS carrying an aggressive coupon of 7.60 per cent.

Tata Chemicals is planning a Rs 100 crore issue of 2.5 years maturity. The issue will be book-built and the indicative coupon rate is 7.25-7.40 per cent.

Commercial papers

Activity in commercial papers, which was lacklustre last week, will depend on whether the RBI effects a cut in the repo rate.