It has been perhaps an issuers market in corporate bonds over last one month as companies could raise funds through 10-year bonds at just 2-3 basis points higher than through 1-year corporate bonds.
This could change now as 1-year bond yields could ease by January end, wiping out this advantage for issuers as most participants expect the Reserve Bank of India to cut rates at the policy review.
The curve could steepen once short-term rates correct downward. We could see a spread of at least 5-10 basis points between 5-year and 10-year bond, said Ajay Manglunia, head, fixed income at Edelweiss Financial Services.
The yield curve, currently flat, is expected to get steeper as short-term yields fall. The 1-year corporate bond yield is currently around 8.7% while both 5-year and the 10-year corporate bonds were at 8.74% in the secondary market. Companies have raised over R26,000 crore through corporate bond issuances across tenures during October-December.
In December, Power Finance Corp raised R1,000 crore through 2-year bonds at 8.75% and Exim Bank raised funds at 8.76% yield through 5-year bond.
If we see a rate cut in January as expected, 1-year and 2-year bond yields could fall sharply. The 5-year yield may also fall but not much as rate cut has been priced at, said a merchant banker with a private bank.
One-year bond yields are expected to fall by 5-10 basis points aided not just by a possible policy rate cut but also by thin supply.
The 5-year bond yield fall could be limited to 2-3 bps as bond supply from public sector entities is likely to check the fall in the yields, dealers added.
Rural Electrification Corp and Indian Railway Finance Corp are said to be in talks with merchant bankers for potential private placements of five-year bonds in January-February period. The 10-year tenure may also see big supply with most PSUs looking to raise money here as well.
The yield on the top-rated public sector entitys 1-year corporate bond was around 8.7% on Thursday in the secondary market, about 4 basis points lower than the 10-year bond yield. There has been no spread between 5-year and 10-year tenures.
The spread between tenures has been miniscule for better part of 2012 with the widest spread being around 15 basis points in November. Since December, the maximum spread between two tenures on the corporate bond yield curve has been just about 5 bps.