Summary of this article
Bond yields have risen over 10 basis points since RBI cut the repo rate in December
Investors are in a risk-off sentiment, broad market uncertainty limits aggressive investor bets
India’s bond yields have hardened over the past two weeks despite the Reserve Bank of India delivering a rate cut of 25 basis points on December 5. Most bond market participants are of the view that bond yields will move in a narrow range with limited bias for yields to fall, as the RBI’s rate easing cycle is mostly seen over.
Some public sector companies have withdrawn their bond issuances due to the fear of higher yield payout for them. Among these was Indian Railway Finance Corporation (IRFC), which cancelled its zero-coupon bond raise worth Rs. 5,000 crore yesterday as investors demanded higher yields, sources said. The company received bids at 6.95 per cent for the zero-coupon bond, 16 bps higher than the cut-off last month, while raising a similar security. IRFC had raised Rs. 2,981 crore at 6.79 per cent through a deep-discounted zero-coupon bond.
The higher yield demand by investors is largely because of the uncertainty around future rate cuts. Overall increase in costs for companies due to higher tariff imposition on Indian goods by the US, which reduces the competitive ability of companies among Asian peers, is also a reason.
Additionally, investors are opting for safer bets such as government securities rather than corporate bonds, which are considered riskier assets, market participants said. The scepticism around interest rates has led to a rise in government bond (G-sec) yields, too. The 10-year benchmark G-sec yield rose around 15 bps despite the RBI cutting rates. The yield spread on a 10-year corporate bond over G-sec of similar maturity is around 64 bps, which experts say is going to widen in the near term as more investors opt for G-sec over corporate bonds.
“The spread between Corporate bond yield and G-Sec at 10-year maturity is near historical lows, and we expect it to further widen in the near term due to rising global treasury yields, FPI outflows from Indian bonds, and deteriorating investor confidence as evidenced by multiple PSU bond cancellations.” Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser (RIA), said.
Strong sales by foreign portfolio investors have also led market participants to steer clear of placing aggressive bets in the bond market. The 10-year benchmark US treasury yield is hovering around 4.18 per cent, up over 19 bps over the past three weeks, despite the US Federal Reserve cutting its benchmark rate by 25 bps in December.
Some market participants expect long-term investor demand to pick up as institutional investors buy bonds to meet regulatory requirements near the end of the financial year, which ends in March. However, with expectations that state bond borrowing may rise in the next quarter as well as pressure due to overall broad-based conditions, demand for corporate bonds may remain muted, according to others.
“State bond spreads over G-Sec have also widened to around 50bps. But there is a risk-off sentiment existing in the market, so more people are opting for G-Secs over state bonds or corporate bonds,” a bond dealer at a mutual fund house who wished to remain unnamed said. “I think shorter tenure G-sec is going to continue to see demand over others.”
