Fund raising through corporate bond sales rose sharply by 49% month-on-month to Rs 82,378 crore on the back of large issuance by some banks and state-owned entities even as the rates on these instrument rise, dealers said.
This was because most issuers have raised funds before yields started to move up, said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.
Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, whether building a new plant, purchasing equipment, or growing their business. When one buys a corporate bond, one effectively lends money to the "issuer," the company that issued the bond.
According to data from Prime Database, companies and banks raised funds worth Rs 82,378 crore in September, compared to Rs 55,500 crore raised in the previous month. Data also showed that funds raised in September was the highest in the current financial year.
Also read: Spread between 10-year SDLs, G-Secs narrows to historical low on high demand from investors
State Bank of India, Housing Development Finance Corp. Ltd, Power Finance Corp., Small Industries Development Bank of India, and HDFC Bank were among the top five issuers in September, together raising Rs 31,708 crore. The money raised by these five entities amounted to 39% of the total funds raised in September.
"Issuance has risen in September because bond yields were supported due to expectation of global bond index inclusion, positive FPI (foreign portfolio investment) flows, lower SDL (State Development loans) supply and strong investors demand which reflected in primary issuance bidding. Also credit off-take has been positive, clocking around 16% Y-o-Y growth and with the festive season approaching we may see a significant rise in demand for money," said Sanjay Pawar, Fund Manager – Fixed Income, LIC Mutual Fund Asset Management Ltd.
Also read: Issuance of commercial paper, certificates of deposits down in September on elevated borrowing costs
Yield movement
Yield on corporate bonds maturing in three years rose by 45 basis points, five years by 40 basis points and 10-year by 22 basis points month-on-month in September, tracking an uptick in government securities yield and low demand from mutual funds. One basis point is one-hundredth of a percentage point.
Pawar added that the market had seen a hardening of yields across the segment both in government securities and corporate bonds due to a delay in the inclusion of the country's bonds in its global index, the central bank hiking rates aggressively, a rally in crude prices, weakening rupee and draining out of liquidity from system.
Further, the yield on benchmark government bonds has risen by 25 basis points, whereas due to the quarter-end there was redemption pressure on mutual funds that led to a rise in yields on corporate bonds.
According to data compiled from the corporate bond deals, the yield on three-years corporate bonds that were trading at a 7.10% rose to 7.55% in September, yield on five-years paper rose to 7.65% from 7.20%, and the yield 10-year paper rose to 7.72% from 7.50%.
Going forward
Debt dealers said yields are expected to rise further due to heavy supply in the second half of the current financial year and expectations of further rate hikes by the Reserve Bank of India (RBI).
While issuers will keenly watch the movement of the yield on government securities, which were expected to rise further given higher crude oil prices.
Usually, higher Brent crude oil prices put pressure on the inflation print, leading to a dampening of investor sentiments . In the last few days, Brent crude oil prices had risen sharply after OPEC and its allies decided to cut production output by 2 million barrels per day. Brent crude oil prices were trading at $97.38.
Moreover, the spread between corporate bonds and government securities, which is hovering at a historical low, is expected to rise as supply may increases and if liquidity conditions tighten further, Pawar said.
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