Not finding enough takers for credit and looking for treasury gains, banks are turning to the corporate bond...
Not finding enough takers for credit and looking for treasury gains, banks are turning to the corporate bond market where yields are at a 20-month low, reports Aparna Iyer in Mumbai.
“Banks are increasing their investments in corporate bonds as they see a trading opportunity, with interest rates likely to come down further,” said Shashikant Rathi, senior vice-president at Axis Bank. Rathi added that several companies, including Tata Power and a subsidiary of Larsen & Toubro, are tapping the bond market in search of cheaper funds. For a AAA-rated firm, rates have fallen by 25 basis points in the last two months.
Moreover, the spread between AAA-rated corporate bond yield and that of the government bond has shrunk to 50 basis points from around 60 bps in December or 10 bps. The spread for AA+ and AA-rated has contracted by an even bigger 20 bps.
Bond dealers are confident many private sector companies will hit the bond markets since banks’ term loans continue to remain 100 bps dearer than yields on corporate bonds. The base rates of most lenders have remained in the 10-10.25% band and many of them are reluctant to cut rates despite the Reserve Bank of India’s surprise repo rate cut on January 15. However, the bond market has priced in an additional 50-75 bps rate cut by the RBI, driving down corporate bond yields. The biggest beneficiaries of the fall in yields could be companies that are rated AA+ and lower.