5-Year Bond Yield May Settle At 15%

Investor resistance to recent private placements of corporate bonds at coupons of 14.50 per cent is giving rise to a feeling in the market that five-year corporate bond rates may settle at yields of 14.75 to 15 per cent.

Reliance Industries concluded placement of bonds worth Rs 100 crore on Wednesday, while Nestle wrapped up a Rs 50 crore placement yesterday. However, the all-in cost of these issues was significantly higher than the 14.5 per cent coupon as the issuers had to offer incentives to attract investors. Brokers and merchant bankers said this pushed the all-in cost of funds to 14.8-15 per cent.

 

One reason for the investor resistance could be that banks feel that with interest rates likely to rise towards the second half of the year, it is not feasible for them to lock into 5-year bonds at 14.5 per cent, when their prime lending rate is currently hovering at 14 per cent. Therefore, interest rates for prime borrowers are likely to stabilise at around 15 per cent.

The market is resisting coupons of 14.5% for five-year paper, said an ANZ Grindlays official. Nationalised banks like the SBI, Bank of Baroda and Dena Bank confirmed that such a trend exists. We have not picked up any bonds at 14.5 per cent, said a senior SBI treasury official. We are only looking at bonds with yield in excess of 15 per cent, he added. The Grasim issue placed Rs 50 crore with banks at a coupon of 14.75 per cent without any upfront discounts or incentives.