Yields on the 10-year government bonds have fallen to their lowest since demonetisation, a movement sharp enough to leave their corporate bond counterparts far behind.
The 10-year bond yield closed at 6.33 per cent on Tuesday, the lowest since December 6, 2016. The bond yields had plummeted in 2016 due to huge liquidity in the banking system after the government demonetised high-value currency.
The five-year government bonds also closed near the same level, at 6.35 per cent. The spread between the government bond and equivalent maturity private bonds, however, has widened as corporate bond yields have not fallen as sharply as G-secs.
The fall in G-sec yields has been made possible due to aggressive bond purchases by the central bank, which was not available for the corporate bonds. So, even as the RBI has reduced rates three times since February by 25 basis points (bps) each, corporate bond yields also fell, but not as much as yields on the government bonds.
Where the spreads (the difference between G-sec and corporate yields) used to be 60-70 bps, or even 100 bps in times of stress, have widened to about 130 bps for bonds of top-rated public sector companies. For private sector bonds, though, the situation is even more complicated. The spreads there have widened 130-140 bps for top-rated papers and are refusing to come down.
According to a report by CARE Ratings, the weighted average yield of corporate bonds was at 8.28 per cent in June. This is way better than 9.91 per cent of the weighted average yield in September last year, when the corporate bond market nearly froze for non-banking financial companies (NBFC) after the IL&FS default and the hammering of stocks of housing finance companies.
“AAA-rated NBFCs and non-NBFCs witnessed higher borrowing costs in the bond market relative to banks. The cost of borrowings for HFCs and AIFs (alternative investment funds) was 21 bps and 35 bps lower in the corporate bond market. While it was 40 bps and 21 bps higher for NBFCs and non-NBFCs,” CARE said analysing the June data.
The mutual funds are not buying the bonds much after the IL&FS and DHFL Ltd fiasco, and the market is largely left to banks and pension and provident fund players.
“The pension and provident funds have a mandate to generate returns of 8 per cent plus, which is possible if they invest in highly rated, and also high yielding corporate bonds. In the absence of enough investors, these institutions can technically set the floor through their investment patterns,” said Soumyajit Niyogi, associate director at India Ratings and Research.
But the lack of demand for corporate bonds are quite natural.
“When AAA-rated papers get junk rating in a matter of weeks, the market sentiment would be shaken,” said Ashutosh Khajuria, executive director and CFO of Federal Bank.
According to chief economist of a large bank, the difference between the repo rate and G-sec 10-year yields historically has been 100 bps. Right now the difference is about 60 bps. This shows the policy rate has more room to fall, as the market is factoring in more rate cuts.