As govt bond yields fall, corporate debt remains unaffected; what’s holding up private bond yields?

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Updated: July 17, 2019 5:50:29 PM

Even as yields on 10-year government bonds fell to the lowest level since demonetisation in 2016, the corporate bonds have remained largely unaffected.

The funds raised thus can flow out of fixed deposit to the SPV if the public buys the bonds, it said, adding this will not have an impact on bank deposits or credit growth. (Representational image)It was on December 6, 2016, that the yield on the 10-year bond declined 10 basis points to 6.33 per cent as on Tuesday.

Even as yields on 10-year government bonds fell to the lowest level since demonetisation in 2016, the corporate bonds have remained largely unaffected. The spread between the government and corporate bonds has widened mainly on account of comparatively lesser decline in yields of corporate bonds as against G-secs. While rise in demand of government bonds and the probability of a rate cut by the RBI are reasons behind fall, several defaults in corporate space are holding the yields up for company bonds, the experts said.

It was on December 6, 2016, that the yield on the 10-year bond declined 10 basis points to 6.33 per cent as on Tuesday. The yield has declined by nearly 100 basis points in FY20 so far even as inflation remained benign and liquidity scenario improved. The yield on benchmark 10-year bonds on Tuesday plunged to a two-and-a-half year low of 6.31 per cent before closing at 6.33 per cent. At the time of reporting, the bond yield was at 6.37 per cent, according to Bloomberg index. Bond yields and prices move in opposite directions.

“The plan for the GoI to raise sovereign debt in foreign currency has contributed significantly to lowering G-sec yields, with limited impact on other bonds,” Aditi Nayar, Principal Economist, ICRA told Financial Express Online.

Also read: Government may cap overseas borrowing at $5 billion this year, says DBS report

The corporate yields have not fallen in the same way as government bonds, largely on account of the series of downgrades that corporate sector saw recently, veteran technical analyst Milan Vaishnav told Financial Express Online.

“This has made the domestic corporate bonds quite risky and a rush towards government bonds is nothing but a frantic flight to safety post the various debt defaults on the Indian corporate landscape. The fixed income market participants have presently preferred to own Government bonds rather than a corporate bond,” he added.

“Right now given the sharp rally in the Govt Bonds and the issues related to DHFL, ADAG group and some corporate downgrades the spreads on corporate debt is elevated,” veteran investment advisor Sandip Sabharwal told Financial Express Online. However, he doesn’t expect the fall to continue in the coming days.

The yields will, however, return to normal levels in the coming days, he added. “Ideally the best way to do this is for RBI to increase system liquidity further which they are not keen to do at this stage,” he added.

“GSecs down as people have seen excess liquidity, expect rate cut, less paper to be issued if there is a global sovereign bond etc. therefore, yields are down. But for corporate bonds the situation has not changed reflecting credit risk perception has not changed as yet. Therefore there will be some anomalies in the markets,” Madan Sabnavis, Chief Economist, CARE Ratings told Financial Express Online.

Even as the spreads look attractive, there are not many takers for the same currently, Sanket Desai, Head of Research & Advisory – Wealth, IndiaNivesh Securities told Financial Express. “Wider spreads may continue for some more time till the risk appetite improves in the system.” he added.

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