1. Lower CPI drags yields on short-term corp bonds

Lower CPI drags yields on short-term corp bonds

A sharp fall in the consumer price index (CPI) in July, aided by ample liquidity in the market, has led to a fall in short-term bond yields by at least 20 basis points compared to levels seen in late June.

By: | Mumbai | Updated: August 14, 2015 12:25 AM

A sharp fall in the consumer price index (CPI) in July, aided by ample liquidity in the market, has led to a fall in short-term bond yields by at least 20 basis points compared to levels seen in late June.

According to information provided by sources till the time of filing this copy, Power Finance Corporation (PFC) on Thursday priced its three-year bond issue at 8.17% to raise Rs 800 crore.

Bloomberg data shows that for similar-tenure bonds, the company had paid a coupon rate of 8.40% towards the end of June—showing a 23 bps reduction in yields.

At this rate, the difference between the bond yields and the lowest bank base rate in the system stands at more than 150 basis points strengthening the case for an incremental shift by companies to the corporate bond market.

Gr5

A base rate is the lowest rate at which a bank can lend money. Bond arrangers indicated PFC is issuing bonds at three different maturities—one in April 2017, another in May 2017 and the third in August 2018.

“The bonds maturing in 2017 are priced at 8.12% and have received a massive response worth Rs 4,000 crore. PFC will be retaining Rs 2,000 crore through these maturities,” said a bond arranger close to the development adding that mutual funds have been a major investor in this issue.

Market participants attribute the fall in yields primarily to rate cut expectations gathering pace over ease in inflationary pressures and ample liquidity available in the system.

Lakshmi Iyer, chief investment officer-fixed income and head of products at Kotak AMC observes that the system is witnessing comfortable liquidity.

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“Moreover, a better than expected CPI data has added fire to the already prevalent expectations of another rate easing. All these factors are bringing the short-term yields in corporate bond and money markets to multi-year lows,” Iyer said.

On Wednesday, the consumer price index (CPI) for July came in at 3.78% which was way lower than the 5.48% figure in the month of June.

A fall in inflation is considered as further headroom for the central bank to reduce interest rates.

The only obstruction seen in the way to further reduction in yields is a possible hike in the interest rates by the US Federal Reserve in September.Considering that part of that possibility has already been factored-in by the markets and inflationary pressures are also easing significantly, a further fall in the repo and subsequent softening in short-term bond yields cannot be ruled out altogether. Sandeep Bagla, associate director at Trust Group believes there is a case for another round of rate easing this year itself.

“With inflation easing off, there is a good possibility of another 25 bps rate cut in the current calendar year. Even with a rate cut, inflation in January 2016 is likely to stay below 6%,” Bagla said.

Bond tale
* Bond arrangers show PFC issuing bonds in April 2017, in May 2017 and the third in August 2018
* The bonds maturing in 2017 are priced at 8.12% and have received a massive response worth R4,000 crore
* Market participants attribute the fall in yields primarily to rate cut expectations gathering pace
* On Wed, the consumer price index (CPI) for July came in at 3.78% which was way lower than the 5.48%

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