Average corp bond spread falls to lowest since December 2018

By Shashank Nayar

The average corporate bond spread — the difference between yields of corporate bonds and government bonds of the same tenure — for 10-year paper rated AAA has fallen to 108 basis points in April, the lowest since December 2018, according to data compiled by Bloomberg.

Total issuances of corporate bonds through private placements amounted to Rs 1.21 lakh crore in March, the highest monthly issuance in FY19, against issuances of Rs 42,908 crore in February, according to data sources from Prime Database.

For instance, Housing Development Finance Corporation (HDFC) had issued a 10-year corporate bond on March 27 at 8.55% at a time when the G-Sec traded at 7.47%, resulting in a spread of 108 bps. However, HDFC issued a similar tenure bond at a coupon rate of 8.66% on December 21, 2018 at a time when the benchmark G-Sec traded at 7.37%, resulting in a spread of 129 bps.

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Dealers believe that high issuances can be attributed to higher issuances from public sector banks for additional liquidity. “We have seen a lot of public sector banks issuing bonds in March to curb the liquidity deficit and by corporates to fulfil the RBI debt framework,” said Ashish Jalan, AVP, SPA Securities.

Corporate bond yields across all maturities and rating categories in March averaged 8.67% – the lowest in the past four months and 31 bps higher than December 2018, according to Care Ratings.

Corporate bond yields are expected to gradually fall following 25 bps rate cut by the Reserve Bank of India to 6% in April this year and also due to falling inflation. “On account of two consecutive rate cuts from the RBI in Q4 and higher inflows in Indian markets by foreign portfolio investors (FPIs), the yields have fallen to current levels and are expected to fall further,” said Mahendra Jajoo, head of fixed income, Mirae Asset Global (India).

At a time when corporate bond yields and spreads have been falling, the marginal cost of funds-based lending rate (MCLR), the rate below which a bank cannot lend, was higher than corporate bonds yields in February and March by 11 bps and 8 bps, respectively. The average MCLR in FY19 averages at 8.61%, while corporate bond yields averaged at 8.93%.

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“With the secondary market yields determining the rate of interest paid by corporates for fresh funds raised, it thus follows that borrowings from the corporate bond markets have gotten costlier compared with borrowings from banks,” said experts at Care Ratings. For the past two years, the bank rate was higher than the corporate bond yield.

Non-food credit grew by 13.75% y-o-y during the fortnight ended March 29, slower than 14.4% y-o-y growth in the previous fortnight, continuing to outpace the deposit growth. During the comparable fortnight year ago, the non-food credit growth of the scheduled commercial banks stood at 10.54%, RBI data showed.

“The low deposit growth is attributable not only to technical reasons such as rising currency in circulation (CIC), but also to structural and cyclical factors – constant moderation in nominal GDP growth and a change in households’ behaviour from savings-focused investor to consumption-focused leveraged consumer,” said experts at Edelweiss.