Corporate bond yields rise, trading declines as mkt eyes rate cut

Written by Mahalakshmi Hariharan | Mumbai | Updated: Jan 31 2009, 05:43am hrs
With the market expecting a rate cut and Reserve Bank of India (RBI) maintaining status quo on rates in its third quarter monetary policy review, the corporate bond yields have witnessed upward movement by almost 100 basis points. The trading volume in corporate bonds has also fallen by almost 50% post the credit policy announcement.

The market is now looking forward to the upcoming bond issuances, which is likely to kick off during the quarter. On Thursday, the corporate bond yields rose to the highest in more than a month, ahead of the government bond auction, which is to be announced on Friday. Currently, the 10-year corporate bond yield is trading at around 9.25-30. The yield has gone up by almost a 100 bps since the pre-monetary policy announcement, said S Srinivasa Raghavan, vice-president and head of treasury with IDBI Gilts. Total volumes traded in the corporate bond market on Thursday were around Rs 1,151 crore as against Rs 2,142 crore on Wednesday.

Raghavan noted that the movement in the corporate bond yields is very similar to that of the government securities, which have also inched up after receiving no interest rate cut signal from the RBI.

On Thursday, the yield on the 10-year benchmark paper ended at 6.11%, higher than 6.04% on Wednesday. The government has bought back Rs 3,000 crore of bonds on Thursday. They will auction Rs 10,000 crore worth bonds on Friday, including a new 10-year bond for Rs 4,000 crore. Traders noted that there will be heavy supply of bonds during the quarter.

We will see many public sector banks coming forward to issue bonds, said B Prasanna, managing director and CEO, ICICI Securities. Traders said banks such as SBI, Oriental Bank of Commerce, UCO Bank, Indian Overseas Bank and some private companies may come up with domestic bond issuances. The market will also see companies such as Power Finance Corp and Indian Railway Finance Corporation issuing bonds in February, said a dealer.

With issuances piling up, we can expect the 10-year paper's yield to go up further by at least 10-20 bps in the coming weeks, said Raghavan.

However, market is watching the interest rate scenario closely. With inflation on a decline and poor industrial growth, there are expectations of another round of rate cut soon.In the current environment of declining inflation and subdued industrial growth, we expect the soft interest rate regime to continue.

Therefore, corporate bond yields are likely to soften further in 2009, said S Venkataraman, senior director, Crisil.