The key factor aided the fall in corporate bond yields in May was increased buying by domestic and foreign investors on improved market sentiments post the election results, which brought down yields in the secondary market.
Corporate bonds issuances through private placement saw a four-fold increase in May 2019 as it amounted to Rs 43,577 crore, compared with Rs 10,539 crore in the same month last year, as per Security Exchange Board of India (Sebi) data. In April 2019, total issuances were Rs 70,064 crore.
Corporate bond yields witnessed a sharp fall across different maturities in May. The weighted average yield of corporate bonds across categories declined to a 17-month low of 8.31%, 34 bps lower than month ago and 101 bps lower than September 2018.
According to the Bloomberg data, the average corporate bond spread for ‘AAA’ rated 3-year paper rose by 15 bps to 135 bps in May, from 120 bps in April. For instance, the Nabard issued 3-year papers on May 23 at the coupon rate of 7.85% when on the same day, G-Sec bonds were trading at 6.78%, which is a spread of 107 bps. On April 18, the Nabard issued papers with the same maturity at a coupon rate of 7.90% and on that day G-Sec bonds with same maturity were trading at 6.97%, which was a spread of 93 bps.
The key factor aided the fall in corporate bond yields in May was increased buying by domestic and foreign investors on improved market sentiments post the election results, which brought down yields in the secondary market. Since the Lok Sabha elections results on May 23, the FPI inflow in the Indian debt market aggregates to `11,000 crore as on June 11. The easing of the liquidity constraints in the banking system and the decline in G-Sec yields further supported the fall in corporate bond yields, as per Care Ratings analysts.
Bond market dealers said the moderation in yields in recent months can be attributed to the rate cuts by the Reserve Bank of India by 25 bps at its bi-monthly monetary policy, coupled with the higher demand for corporate bonds from insurance companies, provident funds, banks and mutual funds.
The current fiscal could see more companies approaching the bond markets. This is because Sebi’s mandate that requires 25% large corporates — defined as a listed company with at least an ‘AA’ rating and outstanding long-term borrowing of Rs 100 crore or more — to borrow 25% of their requirements through corporate bonds market has kicked in from April 1, bankers said.
The comparison of the average of the median MCLR of the scheduled commercial banks with the movement in the weighted average secondary market yields shows corporate bonds yields in the first two months of the current fiscal year were lower than the lending rate of banks, indicative of the faster transmission of the RBI rate cuts in the bond markets. The corporate bond yields was 9 bps lower than the bank MCLR in April and 44 bps lower in May.