Corporate bond issuances drying up

Yield movement currently impacted due to movement of rupee against dollar

Corporate bond issuances are drying up, as companies shift to bank credit or short-term instruments, rather than private placement of corporate bonds.

Issue arrangers say pricing has posed a major challenge. This is because there are two 10-year government securities (G-secs) — while the yield on the 7.16 per cent security is more than nine per cent, the recently auctioned 8.83 per cent security is trading at a much lower yield.

The yield on the 7.16 per cent 10-year G-sec ended at 9.09 per cent on Monday, while that on the 8.83 per cent 10-year G-sec ended at 8.75 per cent, compared with 9.10 per cent and 8.78 per cent, respectively, on Friday.

Currently, raising short-term money is cheaper compared to a few months ago.

Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities, said, “The yield on the 10-year 7.16 per cent G-sec is still high and there is confusion in the market on whether to consider the yield of the 7.16 per cent 2023 G-sec or the 8.83 per cent 2023 G-sec for pricing corporate bond issuances. For the time being, issuers do not want to lock in at a higher yield. They are either borrowing by way of short-term instruments or they are going for bank borrowings.”

Insurance companies, major investors in corporate bonds, agree the supply of primary issuances has dried up. “In the corporate bond market, there is not much attraction from issuers at these levels. Except for companies such as Rural Electrification Corporation and Power Finance Corporation, others are raising funds from banks, as that is turning out to be cheaper,” said Badrish Kulhalli, head of fixed income at HDFC Life.

Issuers are taking a wait-and-watch approach. Currently, the movement of yields has been impacted due to the movement of the rupee against the dollar. After short-term stability, the rupee has again become volatile against the dollar in recent times.

“Issuers are waiting for the market to stabilise. Yields will stabilise when there is stability in the rupee against the dollar,” said Manglunia.

Meanwhile, the 8.83 per cent 2023 G-sec emerged as the highest traded bond on Monday, replacing the 7.16 per cent 2023 G-sec.

With the 8.83 per cent 2023 G-sec soon becoming the new 10-year benchmark government bond, the Street will get some respite, as the cost of borrowing through private placement of corporate bonds may fall.