Elevated short-term yields prompt PSUs to withdraw planned bond issues

REC withdraws its planned ₹3,000 crore two-year bond issue after PFC pulled a ₹2,500 crore three-year offering earlier this week as investors seek higher premiums

Corporate bond issuers have started deferring planned borrowings as elevated short-term yields have pushed up funding costs. On Thursday, REC withdrew its planned ₹3,000 crore two-year bond issue, while Power Finance Corporation (PFC) had earlier this week withdrawn its planned ₹2,500 crore three-year issuance.

 

Market participants said that the withdrawal of short-term bond issues by AAA-rated public sector issuers, despite liquidity in the banking system being at high levels, is a reflection of pricing issues. Money is available, but investors are unwilling to lock it into two-three-year bonds at current yields and are demanding a higher premium for taking duration risk, they said.

 

With 91-day Treasury bill yields only marginally above the 5.25 per cent repo rate and commercial paper rates also relatively close to the policy rate, money-market instruments are not necessarily offering higher returns. However, they provide investors with liquidity and the flexibility to redeploy funds as the interest-rate cycle evolves. At current two-three-year bond yields, investors appear to be demanding additional compensation to give up that flexibility.

 

“There is no shortage of liquidity; there is a shortage of conviction at the current price for 2–3 year duration. Investors are demanding a higher spread to compensate for the uncertainty over the future interest-rate and inflation cycle, while issuers are reluctant to pay that premium when alternative funding avenues remain available. That explains why some short-tenor PSU bond issues are being withdrawn even as long-tenor issues continue to sail through,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

 

Further, uncertainty around inflation, elevated crude oil prices, the rupee trading near ₹95-96 to the dollar, geopolitical risks in West Asia and possible food inflation pressures from the monsoon are also making investors cautious about taking duration, market participants said. The RBI is also absorbing surplus liquidity through its liquidity management operations, while its recent communication has kept inflation risks on the radar.

 

Market participants said that large borrowers can continue to access commercial paper, bank funding linked to external benchmark lending rates and, where appropriate, foreign currency borrowing. As these alternatives remain available, issuers may not be willing to pay substantially higher yields to raise two-three-year bond funding.

 

The contrasting performance of the 10-year and 15-year segments is significant. Long-term investors, including those investing to meet regulatory, portfolio-duration or asset-liability requirements, are more willing to lock in attractive absolute yields for longer periods. As a result, a 10-15-year AAA-rated PSU issue can attract strong demand even when a two-three-year issue struggles.

 

“The withdrawals are in short term because the yields have surged in that segment, the long term which is 10 year and 15 year is getting good demand,” said a dealer at a state-owned bank. “The short term bond issues are not even getting enough bids,” the person added.