Are Corporate Bond Yields Hurtling Towards A Bottomless Pit?

Are corporate bond yields hurtling towards a bottomless pit? The 7.95 per cent, 5-year Hindalco paper is now traded at 7.85 per cent in the secondary market. Business Standard gets two experts to talk on the issue.

Revival signs lift corporate bonds

Saravana Kumar

Head of Fixed Income Investment, SBI MF

The demand for corporate bonds is mainly due to the initial signs of revival in the economy. In the last two months, a number of corporates had issued bonds at lower yields.

The spread between 5-year gilts and corporate bonds of a similar tenor had narrowed down from 160 basis points to 100 basis points in the last six months.

 

The yields on corporate bonds may come down more due to following reasons: The dollar is expected to depreciate against other major global currencies such as the euro, pound sterling, yen etc, in the next one to three months. So, the rupee may also strengthen against the dollar on a real effective exchange rate (REER) basis. But to make our exports competitive, the Reserve Bank of India may not allow the rupee to gain further.

The central bank could intervene and take measures like a cut in the repo and bank rates so that the local currency does not appreciate. Corporate bond yields may also come down due to ample liquidity in the banking system.

For the last two months, the gilts market has been volatile due to the tensions along the India-Pakistan border. And mutual funds, to avoid volatility in their schemes