Market volatility pushes up short-term yields by 11 bps

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Mumbai | Updated: September 2, 2015 1:54:29 AM

PFC is planning to issue three-year bonds at a coupon rate of 8.28% and five-year bonds at a coupon rate of 8.36%

Yields on short-tenure bonds have risen by at least 11 basis points over the last few weeks led by a devaluation in rupee, sell-offs in the domestic market and uncertainties persisting on the global front.

Power Finance Corporation (PFC) is planning to issue three-year bonds at a coupon rate of 8.28% and five-year bonds at a coupon rate of 8.36%, according to information provided by sources.

“So far the company has received commitments worth Rs 2,400 crore for its three and five-year bonds together. The issue will be open till Wednesday. Considering the current volatility in the market, this can be considered a good response,” a bond arranger close to the development said on Tuesday.


Yields on short-tenure bonds dropped considerably in August led by a fall in the consumer price index (CPI). A few weeks ago, PFC had priced its three-year bonds at 8.17%. This was way lower than 8.40% that the company paid for a similar-tenure bond issue in June, according to Bloomberg data.

However, over the last several days, a host of factors including Rupee depreciation, a massive sell-off in the domestic equity market along with fears of a rate hike by the US Federal Reserve in September has changed investor sentiment. The rupee has depreciated more than 3% over the last three weeks while economic data coming out of the US suggest that a rate hike cannot be ruled out.

Ajay Manglunia, executive vice-president, fixed income at Edelweiss Securities observes in a volatile market, people tend to hold on to their cash rather than investing it while in a stable market, people would like to invest as much as possible and hold on to minimum cash.

“There have been a lot of global events that has spiked the volatility. You are also seeing the currency depreciating over the last few weeks. The outlook of investors towards the market has changed a bit compared with what was trending some time back. People now tend to be with highly liquid instruments like the government securities,” he added.

This is supported by the fact that the 10-year benchmark government bond yield has not risen as much as the corporate bond yields over the past few weeks. The ten-year yield is currently trending at 7.75% levels which is just 4-5 bps higher than what was seen in mid-August.

Ashish Jalan, assistant vice-president at SPA Securities, also supports the view. “The market has seen volatility due to the massive sell-off in the equity market, rupee depreciation and global turmoils. Times like this always plant some sort of doubts in the minds of investors and eventually we could see that reflect in the yields on corporate bonds,” he said.

Another reason that the yields on government securities have not risen is the expectations of a repo rate cut on September 29 policy.

“The market expectation of a rate cut is still there. If you look at the government securities they have rallied a bit which is indicative of what the market outlook is,” Manglunia said.

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