The spread between AAA-rated 5-year corporate and government bonds has narrowed from 17 basis points to 25 basis points since January, while the spread between the two 3-year securities has narrowed by half over the same period.
Typically, companies have to pay higher rates to compensate for the perceived higher risk, but top-rated companies currently pay nearly 7.50% for three-year funds and 7.55% for five-year debt. year.
“We are seeing this because we are concerned whether the supply is there or not,” said a trader at a major state-owned bank.
In the second half of last year, banks, pension funds and insurance companies waited for corporate bond supply, which failed to materialize, the trader added, requesting anonymity.
Even as the economy recovered, corporate bond issuance fell by more than a fifth between April and August this year compared to the same period before the pandemic, in 2019.
This has allowed top-rated companies to raise funds at rates close to borrowing rates on government debt, the safest asset in the Indian market.
For example, the infrastructure finance company
on Wednesday set the annual coupon on bonds maturing in three years and five months at 7.32%.
The yield on three-year government bonds was 7.17% during this period on a semi-annual basis, which, if annualized, is about the same level.
Much of the benefit of lower rates is limited to “AAA” rated companies.
“Corporate bonds rated ‘AA’ or ‘A’ never benefited from excess liquidity during COVID because people didn’t want to take risks,” said Ajay Manglunia, Managing Director of
.
“It’s only when government bond yields relative to ‘AAA’ bonds normalize that people have a better appetite for the lower-rated segments.”
SPREADS CAN GO UP
Spreads could widen from now on, analysts say.
India’s excess liquidity had eased in September and turned into deficit this week for the first time in more than three years, sending a signal that the era of cheap money may be over.
This, in turn, could induce more companies to borrow early in the period.
“In a rising rate environment, everyone would like to freeze their costs rather than keep them uncertain,” Manglunia said.
The tastes of
ICICI and have tapped the market over the past month and are expected to need more funding to amortize their capital.
“As banks move in search of liquidity in the markets, they will pay the price, and that will be passed on to borrowers,” said Anand Nevatia, fund manager at Trust Mutual Fund.
Additionally, as private investment picks up, companies in sectors such as power, industrials and consumer goods are likely to seek funding for capital investments, investors said.
The spread between AAA-rated 5-year corporate and government bonds has narrowed from 17 basis points to 25 basis points since January, while the spread between the two 3-year securities has narrowed by half over the same period.
Typically, companies have to pay higher rates to compensate for the perceived higher risk, but top-rated companies currently pay nearly 7.50% for three-year funds and 7.55% for five-year debt. year.
“We are seeing this because we are concerned whether the supply is there or not,” said a trader at a major state-owned bank.
In the second half of last year, banks, pension funds and insurance companies waited for corporate bond supply, which failed to materialize, the trader added, requesting anonymity.
Even as the economy recovered, corporate bond issuance fell by more than a fifth between April and August this year compared to the same period before the pandemic, in 2019.
This has allowed top-rated companies to raise funds at rates close to borrowing rates on government debt, the safest asset in the Indian market.
For example, the infrastructure finance company
on Wednesday set the annual coupon on bonds maturing in three years and five months at 7.32%.
The yield on three-year government bonds was 7.17% during this period on a semi-annual basis, which, if annualized, is about the same level.
Much of the benefit of lower rates is limited to “AAA” rated companies.
“Corporate bonds rated ‘AA’ or ‘A’ never benefited from excess liquidity during COVID because people didn’t want to take risks,” said Ajay Manglunia, Managing Director of
.
“It’s only when government bond yields relative to ‘AAA’ bonds normalize that people have a better appetite for the lower-rated segments.”
SPREADS CAN GO UP
Spreads could widen from now on, analysts say.
India’s excess liquidity had eased in September and turned into deficit this week for the first time in more than three years, sending a signal that the era of cheap money may be over.
This, in turn, could induce more companies to borrow early in the period.
“In a rising rate environment, everyone would like to freeze their costs rather than keep them uncertain,” Manglunia said.
The tastes of
ICICI and have tapped the market over the past month and are expected to need more funding to amortize their capital.
“As banks move in search of liquidity in the markets, they will pay the price, and that will be passed on to borrowers,” said Anand Nevatia, fund manager at Trust Mutual Fund.
Additionally, as private investment picks up, companies in sectors such as power, industrials and consumer goods are likely to seek funding for capital investments, investors said.
