What is the three steps approach to bond investments?
We had elaborated on the three steps approach to bond investments in our earlier issues of Search for Yields, the weekly newsletter on bond investments from INRBonds. The 3 steps are:
1. Will interest rates go up or down - Interest rate risk
2. What will guarantee my capital - Credit risk
3. Will I be able to sell the bond quickly - Liquidity risk
Using these three steps we will evaluate the PFC bond IPO for investments.
PFC bond IPO
PFC (Power Finance Corporation), a PSU, is opening a bond IPO on 15th January. Click here to read our credit note on PFC. The issue is open to institutional and non institutional investors including individuals.
The bond issue has various options of maturity from 3 years to 15 years and has fixed and floating rate component. Click here to read the Issue Details.
Individuals investing below Rs 10 lakhs get higher interest rates.
Should you invest in PFC bond IPO and if Yes, in what category of bonds?
Lets look at PFC bond issue with the 3 steps approach
1. Interest rate risk - Interest rates are most likely to go up from here as highlighted in our fixed income strategy not for 2021. Click here to download the strategy note. Given higher rates, either a short tenor option for 3 years or 5 years or a floating rate options is better for non institutional investors.
2. Credit risk - PFC is fully owned by government of India and has high commitment from the government given its strategic importance. Credit risk is very low for PFC
3. Liquidity risk - PFC is widely held and accepted by all investors due to its PSU status. Liquidity is reasonable good.
Given the above, the primary risk is interest rate risk and the floating rate option that gives a spread ( or yield pick up) from the benchmark 10 year government bond is a good option. The spread is 80bps i.e if government bond yield is 6%, the interest rate is 6.8% and this will change every half year year based on the change in government bond yield. When government bond yield moves up, the interest rate will be higher on the bond.
INRBonds order book has PFC bond IPO listed and you can click here to subscribe to the issue. INRBonds does not take any commissions from the arranger or the company as we are transaction neutral.
