With the yields on the government securities seeing a sharp spike in the past two months, the spread between the 10-year G-sec benchmark paper and corporate bonds has shrunk to 105 basis points from 120 basis points.
Currently, the 10-year AAA paper is trading around 8.70% as against 8.40% in October while the 10-year government bond yields have spiked from 7.20% in October to touch the current level of 7.65%. Thus while the bond yields have gone up by 45-50 bps, the corporate bond yields have expanded by about 30 bps.
According to the treasury head of a leading public sector bank, the interest rate scenario looks somewhat uncertain. ?If at all there is a tightening of the monetary policy, it?s possible that yields on corporate bonds will rise further,? he says. ?If there is a rate hike by 50 bps, the yield on the five-year and the ten-year corporate bond papers would shoot up by 15-20 bps,? said Golak C Nath, vice president & economic advisor with Clearing Corporation of India (CCIL).
Both government and corporate bonds have reacted sharply to a scenario of a possible rate hikes by the Reserve Bank of India (RBI) as inflation numbers are shooting up in recent times and GDP. Market watchers also feel that the strong IIP numbers might prompt the central bank to go ahead with some tightening measures.
Wholesale price index rose a faster-than-expected at 4.78% in November, with the food price index soaring to 16.7%. The headline number is higher than October?s 1.34% rise.
Dealers note that during the first week of January, the corporate bond market is expected to see a flood of issuances from banks, mainly the public sector entities worth Rs 10,000-20,000 crore.
They say banks are keen on raising these funds before the monetary policy, as they anticipate rate hikes by the RBI during the policy.
?There will be a flood of primary market issuances by banks, especially public sector banks like SBI, Vijaya Bank and Bank of India, that too before the monetary policy itself as there is a wide expectation of rate hikes during the policy after which it may get expensive to raise funds,? noted S Srinivasa Raghavan, vice president & head of treasury at IDBI Gilts.
With rate hikes on the cards, there is an expectation that both the benchmark five-year AAA corporate paper and 10 year AAA corporate paper to soar up.
Nath also noted that the demand for corporate bonds have grown sharply, with banks and primary dealers among the buyers.
?With lower interest rates and ample liquidity, the trading volumes have gone up. Higher volatility in the bond yields have has also contributed to the increased trading volume in corporate bonds,? Nath added.
Going forward, with the introduction of the repo facility in the corporate bonds, the appetite for corporate bonds would increase, especially from the mutual funds, said Raghavan.
According to the PRIME Database, the first half of 2009-10 has seen companies mopping up close to Rs 84,000 crore by placing bonds mainly with banks. That?s about 25% higher than the Rs 67, 000 crore or so mobilised in the corresponding period of the previous year.
Public sector firms have been among the bigger borrowers and accounted for approximately two thirds of the total amount raised through this route.
The total turnover in the corporate bond market reached Rs 2.11 lakh crore during April-November 2009, up 42% over the previous financial year, according to markets regulator, SEBI. During 2008-09, the total turnover was way below at Rs 1.48 lakh crore.