Yield on AAA-rated PSU bonds breaches 7% as long-term rates firm up

Yields on 10-year AAA-rated public sector undertaking (PSU) bonds in India’s corporate bond primary market exceeded the 7 per cent threshold on Monday, after a gap of three months, as long-term rates continue to rise.

 

Notably, REC Limited raised ₹2,865 crore through 10-year bonds at a coupon rate of 7.06 per cent. Additionally, the company secured ₹4,000 crore via 2-year bonds at a 6.60 per cent coupon rate.

 

“REC’s 10-year issuance today saw a cut-off of 7.06 per cent confirming the firming yield trend. Despite the upward movement, limited fresh supply of 10-year bonds and sustained investor demand in REC bond have helped keep the coupon levels orderly,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

 

Meanwhile, the yield on short term bonds -- particularly up to the 5-year segment -- have been witnessing strong demand post monetary policy review outcome earlier this month.

 

These instruments are typically bought for interest income rather than capital gains. A combination of monetary policy easing, abundant liquidity infusion in the system, and Cash Reserve Ratio (CRR) cut by the Reserve Bank of India (RBI) in the recent monetary policy review weighed on the short term bond yields, said dealers.

 

“There is demand for short term bonds after the policy, but the rates on papers of tenure 10 year and above are rising, and they are expected to harden further. The 10-year government bond yield touched 6.40 per cent today (Monday), which eventually reflects in the corporate bond primary market,” said a dealer at a state-owned bank.

 

The yield spread between 3-year government bond and benchmark 10-year bond has increased by more than three-fold to 48 basis points, against 15 bps at the start of the financial year, whereas, in the current calendar year the yield spread has widened by twelve times.

 

Since January, the RBI has injected ₹9.5 trillion of durable liquidity into the banking system. This infusion helped shift liquidity conditions from a sustained deficit since mid-December to a surplus by end of March.

 

The transition was reflected in the muted demand for daily VRR auctions and elevated SDF balances, which averaged ₹2.0 trillion during April–May. Of the total liquidity injection, ₹5.2 trillion came through open market purchases (including secondary market purchases), while long term VRR auctions and USD/INR buy-sell swaps added ₹2.1 trillion and ₹2.2 trillion, respectively.

 

The net liquidity in the banking system was in a surplus of ₹2.41 trillion as of Sunday, latest data by the RBI showed.

 

The domestic rate setting panel cut the banks’ cash reserve ratio (CRR) by 100 basis points to 3 per cent of their net demand and time liabilities in four tranches starting September. The reduction in CRR is expected to infuse ₹2.5 trillion of primary liquidity in the banking system by the end of November.