Corporate bond yields continue to harden despite RBI's repo rate cut

SBI, PNB, BoI expected to tap market for fund raise

Despite the Reserve Bank of India’s (RBI’s) recent decision to cut repo rate by 25 basis points (bps), corporate bond yields continue to rise due to a persistent liquidity deficit in the banking system over the past nine months, market participants said.

 

The rise in yields is also driven by a surge in corporate bond supply, as companies issue more debt to raise capital, putting upward pressure on yields.

 

Net liquidity in the banking system was in a deficit of ₹1.8 trillion on Monday, latest data by the RBI showed.

 

On the other hand, government bond yields have remained largely stable during this period, contributing to a widening of the yield spread between corporate and government bonds.

 

In February, the yield spread between these two types of bonds expanded by 25 bps, with short-term bond yields rising more sharply than long-term yields. This has resulted in an inversion of the yield curve, a situation where short-term yields exceed long-term yields.

 

The annualised yield on a five-year AAA-rated corporate bond was trading at 7.46 per cent on Monday, whereas that on a 10-year AAA-rated corporate bond was trading at 7.30 per cent.

 

“The corporate bond yield curve remains inverted, particularly in the AAA-rated PSU flow segment. A persistent liquidity deficit continues to weigh on the market, while investors are increasingly favouring long-term instruments to lock in yields,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

 

Srinivasan said banks remain cautious, delaying marginal cost of the fund-based lending rate (MCLR) adjustments despite the repo rate cuts, and the weakening rupee, coupled with sustained FPI outflows, adds to the pressure. “Concerns over potential US tariffs on India and heightened UST yield volatility have further contributed to the upward drift in corporate bond yields across tenors, driven by demand-supply dynamics,” he added.

 

The yield on the benchmark 10-year government bond settled at 6.69 per cent on Tuesday, unchanged from Monday.

 

Meanwhile, Bank of Maharashtra raised ₹1,612 crore on Monday through its 10-year primary issue of infrastructure bonds at an interest rate of 7.70 per cent.

 

The widening of the yield spread reflects the growing risk premium investors’ demand for holding corporate debt relative to government securities.

 

“The government securities are stable because there is an extra buyer in the market, which is the RBI, they are continuously conducting open market operation (OMO) auctions,” said the treasury head at a private bank.

 

The RBI has purchased around ₹60,000 crore worth of government securities via OMO auctions so far.

 

Supply in the corporate bond market is set to increase further as major banks such as Bank of India, Punjab National Bank, and State Bank of India are expected to tap the bond market in the near future. This increased issuance is likely to exert more pressure on corporate bond yields, especially in the short-term segment, contributing to the ongoing inversion of the yield curve.