Corp bond yields surge as govt increases market borrowing

With the government raising its borrowing programme by nearly Rs 90,000 crore, corporate bond yields are expected to see a sharp spike, noted dealers.

Following the announcement of the Budget, the AAA 10-year corporate bond yields have seen a sharp hike by atleast 25-30 basis points.

During the Union Budget 2009-10, the government said that it plans to raise its borrowing by Rs 89,000 crore to Rs 4.51 trillion for 2009-10 (April-March).

The government borrowings were pegged at Rs 3.62 trillion for the current fiscal, during the interim budget.

Power Finance Corp?s (PFC) 10-year bonds were seen traded at 8.65-8.70% post Budget on Tuesday, as against 8.40-8.50% on Friday.

At the same time, the 10-year bonds on Indian Railway Finance Corporation (IRFC) are seen dealt at 8.60-8.70% levels as against 8.45% levels on Friday, noted dealers.

?With the government raising its borrowing programme, as supplies increase, yields on the corporate bonds are expected to shoot up. We will not be surprised if the 10-year corporate bond paper touches 9% this quarter,? said S. Srinivasa Raghavan, head of treasury at IDBI Gilts.

Raghavan noted that with weekly auctions being conducted, the yields are expected to harden. Corporate bond yields are also moving keeping a track on the government securities.

On Tuesday, yields on the benchmark 6.05%, 2019 government bond ended at 7.06%, compared to 7.03% on Monday and 6.83% on Friday.

On Monday, the central bank said it would auction Rs 15,000 crore of bonds on Friday. The yield on the five-year corporate bond ended at 8.07%, higher than Monday?s close of 7.93%.

The spread between the five-year corporate and government debt has now widened to 150 basis points from 136 basis points on Monday.

Yields on the 6.07% note due May 2014 climbed one basis point to 6.46%, since Monday, at the close.

Meanwhile, fresh issuances from IRFC, PFC and NABARD are expected in the near term, said dealers. ?Public sector banks are also looking at coming up with fresh issuances, however are keeping a close watch on the upcoming monetary policy to take a cue on the rates and details on the new borrowing plan,? said a foreign bank dealer.

On Tuesday, finance secretary, Ashok Chawla said that the finance ministry and Central bank officials will meet in New Delhi on July 17 to finalize the new borrowing plan for the April-September period.

Dealers have also noted that volumes on the corporate bonds have improved than before as most investors have rushed in to buy corporate bonds, due to the sudden surge in the yields, following the announcement of the budget.