Corporate bond issuances are set to pick up in coming weeks after a tepid May as the yield spread over government bonds and state bonds has widened, merchant bankers said.
In May, bond issuances had fallen as supply of central and state bonds have managed to corner in most of investors’ funds. Moreover, with the government bond yields hardening faster, the spreads between them and corporate debt reduced, thereby, making sovereign papers more attractive to investors, merchant bankers said. A little over R6,000 crore worth of bonds were issued in May, according to merchant bankers.
The spread between a 10-year state bond and a corresponding corporate bond had shrunk to as low as 5 basis points then. In some instances, state loans were offering higher yields than corporate bonds.
The spread over government bond yields averaged around 40 basis points. Investors have been asking for higher rates from companies because of the rise in state bond and gilt yields. The spread has narrowed considerably,? said a merchant banker from a brokerage firm.
However, in last one week, companies have raised more than R3,000 crore through corporate bond issuance. GAIL raised R750 crore through a bond issue on Tuesday. The bonds were priced at 9.14% yield, roughly a spread of 50 basis points over the corresponding government bond. The spread between other 10-year corporate bonds and the corresponding government bond was 60-65 basis points on Tuesday.
In last 5-7 days, the market has picked up and many issues have come because spreads are now widening,? said Shashikant Rathi, vice-president of debt capital markets at Axis Bank.
In last one week, Rural Electrification Corp raise R500 crores through bonds. HDFC and IDFC launched two tranches of bond issuaces as well.
In coming weeks too, merchant bankers expect more issuers to hit the market as the spreads may widen more. Corporate bond yields tend to be sticky due to illiquid secondary market and a largely non-transparent primary issuance market.
Government bond yields are likely to ease more in the coming days as hopes of policy rate cut by the Reserve Bank of India have strengthened. This will widen the spreads over corporate bond yields, merchant bankers said.
Now onwards, issuances will start rising as the month looks fine in terms of yield spreads,? said a merchant banker at a private bank.
