Widening Spread To Spur Price Rally

There is a price rally expected in corporate bonds as the yield differential has widened with gilt yields falling and yields on corporate papers of comparable maturity remaining the same.

Brisk movement is expected in the 2007, 2009 and 2011 tenors.

Last week witnessed high volumes in the corporate bonds market with papers from Reliance, Exim Bank, HDFC and Power Finance Corporation attracting most of the investor interest.

The Infrastructure Development Finance Corporation is expected to tap the market with a book-built issue to raise Rs 200 crore with a 5-year paper.

Market players feel the issue might be raised at 5.80 per cent.

 

With the gilts market remaining illiquid for some time now, corporate bonds have also lost their sheen as the yield differential between the statutory liquidity ration (SLR) and non-SLR paper is virtually not there.

With the inflation figure expected to be favourable this week, gilt yields are poised for a further fall.

This will make the corporate bonds all the more attractive with the spread widening further.

Commercial papers being replaced

Commercial papers (CPs) are in the process of being replaced by Mibor-linked non-convertible debentures (NCDs).

In short-term instruments, activity is up with many corporates preferring NCDs to CPs in a bid to avoid the stamp duty levy, which is mandatory in the case of commercial papers.

With the long-term outlook on interest rates yet to take shape, corporates and banks are preferring to float and invest in short-term instruments with short exit routes in order to avoid interest rate fluctuations, if any.

Moreover, for investors as well, NCDs work out to be attractive compared with CPs yield-wise.

NCD-linked issues are raised at slightly higher rates compared with CPs, which, despite enabling the issuer to borrow at fine rates, leave the investor almost with no spread on investment.