Interest rates may be peaking, but mutual funds and banks' reluctance to look beyond five years has been forcing state-owned companies to, uncharacteristically, issue short-end bonds. | |
| "This is purely due to the market conditions. As investor interest is stronger in short end rather than long end bonds, we have seen more issues in this tenure," said a dealer with a private bank. |
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| State-owned firms, especially those funding public works and refinancing bank loans, traditionally issue bonds with a tenure of five years and above as these match the tenure of their assets. |
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| Traders take positions only up to five-year maturities because "the demand is concentrated in the shorter end papers", said a merchant banker. |
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| "The investors are mainly interested in up to five-year bonds. Beyond five years, there is an uncertainty about the interest rates," said a senior official at National Bank for Agriculture and Rural Development (Nabard). |
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| Nabard, a regular borrower in the debt market, has also restricted its fund raising plans to shorter tenures. The bank has raised close to Rs 45 billion in the 1-5 year tenures in Apr-Jun, much above its borrowings of around Rs 35 billion through such bonds in the whole of 2006-07 (Apr-Mar). |
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| Banks and mutual funds are unwilling to take a long-term view due to uncertainty surrounding the interest rates and fears of likely monetary steps by the Reserve Bank of India. |
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| Though the declining inflation could reduce the odds for interest rate hikes, the abundant liquidity following huge capital inflows is still a concern. |
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| The fund houses are also avoiding long-term bonds because bulk of their inflows are into liquid and short-term debt funds. |
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| "A short-tenure paper throws open the issue to a larger investor base as mutual funds and banks would be interested. Longer tenures are dominated by insurance companies and provident funds," said the private bank dealer. |
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| A section of provident funds and insurance companies""usually keen on longer term bonds""has also invested in short-term bonds as the yields could fall further going forward, merchant bankers said. The ample liquidity and a sharp fall in short-term yields are also prompting issuers to go for such bonds. |
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| The yields on one-year bonds have fallen by almost 200 basis points to 9% from 11% in April. The 3-5 year bonds have also seen a fall in yields by 30-40 basis points. |
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| "The investor base is also different as mutual funds and banks would be more interested here," said a dealer with a state-run life insurance company. Insurance companies and provident funds prefer 10-year and above tenures. "Insurance companies and PFs may not be interested in a yield below 10% for 10-year bonds," the dealer added. |
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| The yield on 10-year bonds has been steady in the 10.00-10.15 per cent band since April. |
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| Around Rs 40 billion has been raised through primary bond issuances by public sector companies in the first quarter of 2007-08 (Apr-Mar), half of which were in the 3-5 year segment. |
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| Companies such as Power Finance Corporation (PFC), Indian Railway Finance Corporation and Rural Electrification Corporation, which issued 10-year and 15-year bonds in the first quarter of 2006-07 (Apr-Mar), have stuck to shorter tenures this year. |
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| For instance, PFC raised around Rs 10 billion in FY07 through 3-year and 5-year bonds, and has already raised Rs 7 billion this year. Indian Railway Finance Corporation has raised Rs 12 billion through five-year bonds so far this year. |
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