Spreads between corporate and government bond yields — at an 11-month low now — are driving away investors, making it difficult for companies to tap the bond market for funds.
The spread between a ‘AAA’ rated corporate bond and the benchmark government bond in the 10-year segment has shrunk to 40 basis points from as high as 85 bps a year ago. Spreads were 65-75 bps during the January-March quarter, which saw R74,215 crore worth of issuances from companies across various tenures.
There have been no issuances so far in April and bond issue arrangers said that most investors are preferring state development loans and government bonds as yields have risen.
“We have seen no issues because there is no appetite from investors. Investors would rather buy a state bond now or even G-Secs because the yield there is good,” said Ajay Manglunia, senior vice president of fixed income, Edelweiss Securities.
The benchmark 10-year government bond yield has risen 30 bps over the last one week in response to the government’s market borrowing calendar.
Ten-year state bonds that were auctioned on Wednesday carried a yield of 9.65%, a spread of 55 bps over the corresponding government bond. The yield on the bond of a top-rated corporate was quoted around 9.75-9.80%.
Most insurance companies and pension funds look for high yields while investing in corporate bonds as they hold these bonds until maturity rather than trade them regularly. “It makes sense for an insurance company to buy a bond that gives at least 9.50% yield or even more where there is credit risk involved,” said a bond trader at a private insurance company.
While a drop in issuances is typical during April-June quarter, the lack of investor interest is adding to this seasonal drought. Moreover, non-financial top-rated companies are unlikely to tap the market like they did in the beginning of 2013-14 as bond yields are yet to cool off.
“Corporate bond yields have hardened in the last one year and they are yet to correct. Top-rated private companies also don’t have the fund requirement and, if they have, it is met through short-term commercial papers,” said Manglunia of Edelweiss Securities.
Indeed, the interest from AAA rated private companies other than financial companies has dwindled towards the end of 2013-14. During April-June quarter, 25 non-financial private companies raised funds through corporate bonds. This number dropped to 10 by January-March.