Trading volumes in corporate bonds soar on rate cut hopes

Sebi data show that month of April recorded trading volumes of Rs 1.11 lakh crore

The expectations of further repo rate cuts in the current fiscal has not only boosted trading volumes on government bonds, but even the volumes in corporate bonds.

Investors are buying these bonds because with further fall in interest rates, the price of these bonds will increase further from current levels. Data from Securities and Exchange Board of India (Sebi) shows that the month of April recorded trading volumes of Rs 1.11 lakh crore compared with volumes worth Rs 36,038 crore in April 2012 recording a jump of over 200%.

Sebi has data since January 2007 and April recorded the highest monthly trading volume. In the current month the trading volume is already at Rs 53,986 crore compared with volumes of Rs 38,512 crore in May 2012.

“The interest rates will fall further due to which prices of these bonds will go up. There are also flows from foreign institutional investors towards these bonds. In this market investors are booking profits and they are also taking fresh positions,” said Ramesh Kumar, senior vice president (debt), Asit C Mehta Investment Interrmediates.

The yield on the 10-year 'AAA” rates public sector undertaking corporate bond has dropped to 7.67% from 8.79% at the start of the fiscal. The yield is expected to drop further resulting in cost of borrowing reducing for corporates.

“We will see more issuances due to which trading volumes will be high,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

Issuances are expected to also pick up because the base rates of banks are still high.

“While the market volumes have been dominated by 'AAA' rated public sector undertakings, issuances by corporates too have seen a substantial increase. Considering that base rates of banks are still high, better rated corporates have started looking at bond issuances as a viable substitute for their funding needs ever since the yields have started easing. Issuances and trades in 'AA' rated papers has also seen a gradual increase over the last couple of years,” said Pradeep Madhav, managing director of STCI Primary Dealer.

The spread between the 10-year benchmark government bond 7.16% 2023 and the  10-year 'AAA” rates public sector undertaking corporate bond is currently at about 50 basis points.

As yields are expected to fall further, the spread is expected to narrow.

In the current fiscal the Reserve Bank of India (RBI) has already cut the repo rate by 25 basis points earlier this month. Economists are anticipating a further cut of 50 basis points in the repo rate this fiscal due to easing inflation. The repo rate currently stands at 7.25%.