Short-tenure corporate bonds back in demand

Trend due to narrowing difference between short and long-term yields

With interest rates continuing to remain high, the demand for short-term corporate bonds has seen a rise. Traders prefer such bonds, as the difference between the cost of borrowing for a three-year paper and a 10-year paper is only a few basis points.

“The yield curve is flattish, due to which the difference between the cost of borrowing for a shorter tenure and a longer tenure isn’t much. Traders and mutual fund houses are buying shorter-tenure papers, which are subscribed faster,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities. He added typically, long-term papers were bought by insurance companies.

 

However, even insurers don’t have much exposure to corporate bonds, preferring government securities instead.

 

Last week, Power Finance Corporation (PFC) had issued bonds through a private placement. While the coupon rate for the three-year paper was 9.32 per cent, that for the 10-year paper was 9.37 per cent, a spread of a mere five basis points.

PFC declined to comment on the matter. Issue arrangers said other issuers were recording similar pricing. “Rural Electrification Corporation’s two-year paper was priced at 9.27 per cent, while IDFC’s 10-year paper was at 9.36 per cent,” said an issue arranger.

Following the government reducing the weekly auction size of bonds by Rs 2,000 crore a week till September, the corporate bond market has benefited. “Bond yields are trading lower, due to which it is cheaper to borrow this week,” said Arvind Konar, head of fixed income, Almondz Global Securities. He, too, agreed there wasn’t much of a difference between the coupon rates for short- and long-term bonds.

The situation is similar in the case of banks’ overnight borrowings, too. In the recent past, rates have stood at about nine per cent, against the Reserve Bank of India (RBI)’s repo rate of eight per cent. As borrowing under the daily repo window is capped at 0.25 per cent of banks’ net demand and time liabilities, banks have no option but to borrow at such high overnight rates.

Experts believe RBI might continue to keep the repo rate unchanged for the rest of this financial year, as it is focusing on bringing Consumer Price Index-based inflation down to six per cent.

“The yield curve may continue to be flat unless there is a repo rate cut by RBI. This is because with a cut in the repo rate, short-term rates might fall,” said Manglunia.