In a relief to low-rated bond issuers, yields down up to 25 bps in last 6 months

Bonds

Yields on corporate bonds with a AA and below ratings have fallen by up to 25 basis points (bps) in the last six months due to yields on government securities also softening and better economic conditions, experts said.

One bps is one-hundredth of a percentage point.

Money market experts cited this as a positive sign for issuers in this segment who usually get higher yields due to their lower ratings.

Experts further attributed a likely rating upgrade for a few companies owing to their better financial health and stability that has made their bonds attractive. Bond yields and prices move in opposite directions.

“In line with the optimism around the potential rally, the ongoing softening in yields has been encouraging the investors waiting on sidelines to jump and lock in yields,” said Ajay Manglunia, managing director and head of investment group at JM Financial.

Data from Bloomberg showed yield on AA-rated bonds maturing in three years fell 9 bps, five years by 4 bps and 10 years by up to 25 bps. Similarly, yield on three years bonds of A- and BBB-rated companies fell 2-4 bps between January and May. Yields on 10-year A-rated bonds fell around 17 bps in the six months and BBB-rated maturing in 10 years fell 2 bps.

Arun Bansal, head, treasury, at IDBI Bank said these bonds have gained favour due to an absence of issuances from big players like HDFC Ltd, and an increase in demand for HTM or held-to-maturity securities after the Reserve Bank of India (RBI) issued new investment guidelines.

Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap, said increased inflows of foreign capital looking for higher returns compared to developed markets can lead to a decrease in yields on Indian corporate bonds.

In the last few weeks, yield on the government securities, especially on the new and old 10-year benchmark bonds, have eased around 10 bps. Currently, the yield on the 10-year benchmark bond 7.10 percent bond maturing in 2034 is trading at 7.0273 percent.

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What does the trend signal?

Apart from being beneficial to lower-rated bond issuers, it also reflects a healthier financial environment for entities in this ratings category.

Srinivasan added that easing of yields on bonds rated AA and below suggests a combination of improved credit conditions, higher investor demand for yield (thanks to tax amendments on market-linked debentures), positive economic sentiment and expectations of a possibly lower rate of inflation.

“This trend is a positive signal for issuers of these bonds and reflects an overall healthier and more optimistic financial environment,” he added.

Further, Manglunia said issuers have been encouraged to access the market and sees this trend by and large continuing till a formal rate cut announcement, predicted for sometime in the second half of the financial year.

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Yields may fall further

Experts said yields are expected to see even more of a decline due to multiple factors such as liquidity infusion into the banking system by the RBI through bond buybacks and reduction in treasury bill supply.

“Spreads are expected to narrow further by 5-7 bps,” IDBI Bank's Bansal said.

Srinivasan said If the economic outlook continues to remain positive, inflation is kept in check and the RBI brings back a supportive stance and starts reducing rates, yields could stay low or even decline further.