05 Mar , 2021 By : kanchan Joshi
India’s private sector firms are facing the heat of the surge in sovereign bond yields. Two government-owned companies -- Indian Railways Finance Corporation and National Cooperative Development Corporation-- had to cancel their plans to raise money from the bond market this week because of lack of demand. Their private sector peers would find it tougher to get willing buyers.
In a year when the sovereign will borrow an unprecedented rs.12.8 trillion and states will borrow more rs.7 trillion, there is little incentive to buy private sector corporate bonds. After all, they also involve credit risk. Even so, investors looked at almost rs. 6.3 trillion corporate bonds in April-January FY21, according to data from the Securities and Exchange Board of India (SEBI).
But the situation is difficult for companies as yields are now on the rise. Investors want to be compensated for continuing to buy corporate paper through increased yields. They are not mistaken, as government bond yields have also risen. The yield on the benchmark 10-year government bond has climbed more than 35 basis points since January of this year. A basis point is equal to one hundredth of a percentage point.
The impact on corporate bonds was more severe. Yields on AAA-rated corporate bonds over durations increased, with short-term tenures increasing more sharply. Since January, the yield on 3-year corporate bonds has climbed more than 100 basis points while that of 5-year corporate bonds has increased by 70 bps, according to Bloomberg data. Bond investors believe that the rise will not stop here and they have reason to do so.
Sentiment is against bonds globally, as inflation fears have arisen with the rise in commodity prices. From copper to crude, commodity prices have risen, as have sovereign bond yields. Yields on US Treasuries are near their one-year highs and those for European countries are emerging from negative territory. As governments see their cost of borrowing increasing, the private sector cannot hope for cheap funds. For Indian companies, there are also problems with them. The Reserve Bank of India (RBI) is on the path to liquidity normalization. This means that the magnitude of excess liquidity would gradually decrease and the price of liquidity is also on the rise.
But there is a silver lining here. Even with the recent rise in yields, the private sector would continue to benefit from spreads well below their levels of a year ago. For example, the yield on 3-year corporate bonds is currently around 80 bps above the corresponding government bond. It was almost double at 160 bp a year ago.
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