With the market staring at a liquidity shortage — typical at this time of the year when companies pay their taxes — borrowing costs have risen by about 10-15 bps for short-term bonds.
According to the Fixed Income Money Market and Derivatives Association of India (FIMMDA) data, bond yields for AAA-rated two year corporate bonds rose to 8.50% on Tuesday compared to last week’s low of 8.37%.
The RBI mandate of a minimum three-year residual maturity for FPI investments in the Indian debt market has also contributed to the rise in yields on bonds with a maturity of less than three years.
“Because of the RBI guideline on FPIs and the seasonal liquidity crunch, investors are not rushing into corporate bonds, especially those with maturities below three years,” said Shashikant Rathi, senior vice-president, Axis Bank.
Lack of a clear guidance on further interest rate cuts by the RBI has made investors a bit cautious and selective about their investments.
“The spreads on the corporate bond, which actually contracted to 30-35 bps after the rate cut last month, have again gone back to 45-50 bps after policy,” said Ajay Manglunia, senior vice-president, fixed income, Edelweiss Securities.
Longer-term maturity bonds are also seeing the effect of a squeezing liquidity in the market. State-owned Rural Electrification Corporation (REC), which had raised funds through 10-year bonds at 8.23% in January, had to pay 8.27% in February for the same category of bonds.
“Due to advance tax outflows and upcoming spectrum auctions, the market is expecting a crunch in liquidity, which is also one of the reasons for the surge in bond yields,” said Ashish Jalan, assistant vice-president, fixed income, SPA Securities.
Many issuers had foreseen bond yields to remain low for some time and this had led to a flurry of issuances, causing a supply-demand imbalance. Moreover, investors are also maintaining some caution ahead of the Budget.
“Since the Budget is very close, government spending in this quarter is unlikely to be liberal. There has also been a decent supply of bonds by fair number of issuers who had anticipated the borrowing rates to remain low. This has created a demand- supply imbalance, resulting into wider spread,” added Manglunia.
GAIL, Corporation Bank and Canara Bank are some of the prospective issuers that are likely to tap the bond markets in next few days, according to some sources.