Tax free bond yields have come off to ultra-low levels with short yield yields trading below repo rate of 4% and long end yields just 40bps to 50bps above repo rate. At these levels of yields, investors, predominantly the very high net worth investors, are shunning the bonds and bond yields have started to rise.
PFC will open its public issue of secured, redeemable Non-Convertible Debentures (NCD) on January 15, 2021. The NCDs are of the face value of Rs 1,000 each. The company in a statement said the base issue size is Rs 5 billion with an option to retain oversubscription of up to Rs 45 billion, aggregating up to Rs 50 billion.
Corporate bonds trading at over 8% offer spreads anywhere between 200bps to 500bps depending on maturity and yield. At these spreads, the bonds indicate higher credit risk but do not indicate a deterioration in credit hereon, which may be wrong. However, they do indicate a gsec yield curve shift up as, current levels of yields below 5% at the short end look unsustainable given inflation, deficits and asset price bubbles.
Large borrowers, Vedanta and SREI infra have been facing significant stress on their debt indicating that business conditions of many borrowers have deteriorated despite the fiscal and monetary pump-priming due to covid. Credit markets have seen easing of credit risk post the liquidity infusion by RBI but there are many large borrowers that are still facing high stress. Bond holders of stressed companies will face default issues and this could lower credit risk appetite.
An analysis of bonds that trade in the 7% to 8% range reveal that most of the bonds have longer maturity of 7 years and above and many of them are perpetual bonds that carry their own risk. Once interest rates starts to rise in the economy, such bonds will see steeper price fall.
CPI inflation for November 2020 was at 6.93% and with RBI repo rate at 4%, government bonds and corporate bonds of short to medium maturity are trading at levels of 3.25% to 6%. Government bonds of over 15 years and SDLs of 10 years and above maturity are trading in the range of 6.25% to 7%. Corporate bonds of 10 years and above maturity are at levels of 6.5% to 7%.
State government-guaranteed bonds are mostly issued by state-owned entities that are loss-making and are unable to service debt on their own. Power distributors suffer from selling power cheaper than the cost of buying or generating power and the difference is borne by the state. States do not have funds to pay for the losses that keep accumulating and banks stop giving loans as dues mount. Hence bonds issued by such entities are subject to 2 risks, 1. states not paying the entities for losses and 2. states not having discipline to service the debt.
FIIs have pumped in around USD 15 billion into India equities as of fiscal 2020-21 year to date but have sold debt worth around 5 billion. The FII trade signifies that government spending and ultra loose monetary policy will lead to high inflation that will drive up asset prices.
RBI will keep interest rates unchanged in its policy review this week, the repo rate at 4% is at record lows and with banks having huge surplus liquidity, deposits rates are below 4% for many banks. Investors in bank deposits are getting hardly any returns post-tax.
The US Treasury yield curve was last inverted in 2007, just before the great 2008 credit crisis and the recent inversion of the curve has spooked markets. More importantly, the Risk Off nature of markets on the UST curve inversion can add to the Credit Stress in India, where there is a Credit freeze for most borrowers and a weak business outlook is hurting more corporate balance sheets.
Srei Infrastructure Finance Ltd raised funds through a public debt issue in May 2019, when it was rated AA+. The rating since then has been downgraded to A+ with a negative outlook and investors who had invested in the debt issue are facing the implications of the downgrade, which are rise in spreads and lack of liquidity.
State government guaranteed bonds are supposed to carry the risk of the State but while SDLs are seen as almost risk free, guaranteed bonds carry higher risk, whith bonds of such entities defaulting across periods of time due to various issues. Normally the underlying issuer will not be able to service debt on its own due to the subsidies given by the state governments.
AAA to default in just a matter of months, can a company mess up in a few months or has the mess accumulated over ages? In the case of IL&FS, the mess has definitely accumulated over ages as per the latest revelations of the probe by the government.
India Bulls Housing Finance is a classic example of bond markets differing from rating agencies on its credit risk. Spreads are way higher than an average AA- rated bond of a housing finance company. The company has been buying back bonds from the market but still the lack of institutional liquidity is keeping the spreads high.
Retail investors have shown preference for higher yielding bonds of CV lenders such as Shriram Transport Finance and Cholamandalm Investment (perpetual bonds with 3 year yield to call). Institutional investors are largely in M&M Finance and Sundaram Finance. The trading frequency and bond yields and spreads of CV lenders helps us understand investor preference.
Corporate bond yields and spreads over government bonds have dropped substantially since April 2020. RBI lowering interest rates to record lows and guiding for low rates for the rest of this fiscal year has lent stability to corporate bond yields at lower levels in the 1 to 3-year maturity segment. However, over 3 years, the risk of interest rates rising hangs on the market and makes investments risky.
In March-April 2020, RBI provided banks TLTRO liquidity of Rs 1.128 trillion, Banks were required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market, including from mutual funds and NBFCs.
In the October 2020 RBI Policy, the central bank maintained status quo on rates and announced liquidity measures such as on tap TLTRO with tenors of up to three years for a total amount of up to Rs 1 trillion at a floating rate linked to the repo rate
INRBonds has been covering perpetual bonds since the time it has been launched and highlighting the risks it brings to investors. Perpetual bonds spread movement shows that the spread of lower-rated banks such as Punjab & Sind Bank and The South Indian Bank has widened while the spread of big private sector banks and public sector banks has contracted from the levels seen in March 2020 but witnessed an uptick in the spreads during the month of September 2020.
Credit Spreads Snapshot For The Week • 3 and 12 Months CD yields rose by 5-15 bps. • 3 and 12 Months NBFC CP yields fell by 8-15 bps. • Morgan Stanley India Primary Dealer Pvt Ltd issued Rs 6.3 billion, 4-year bond at 5.33%, 80 bps spreads • Bajaj Finance Ltd , AAA, issued Rs 100 million, 10-year bond at 7.25%, 219 spreads • FII debt utilization status stood at 31.78% of total limits. FIIs investment in bonds came down by Rs 45.51 billion
Credit Spreads Snapshot For The Week • 3 and 12 Months CDF yields fell by 5-9 bps. • 3 and 12 Months NBFC CP yields fell by 10-18 bps. • Magma Housing Finance Ltd, AA-, issued Rs 1.4 billion, 1.5-year bond at 8.48%, 436 bps spreads • SBI Cards and Payments Services Ltd, AAA, issued Rs 5 billion, 3-year bond at 5.75%, 140 spreads • FII debt utilization status stood at 32.32% of total limits. FIIs investment in bonds came down by Rs 9.17 billion
Private placement of Corporate Bonds for the period April-July 2020 was at Rs 2.69 trillion against Rs 2.08 trillion in April-July 2019, rising by 29% in a year,as the Covid-19 illiquidity premia reduced under the impact of Operation Twist and TLTRO 1.0 in the last four months and lower borrowing costs have led to record primary issuance of corporate bonds.
RBI is scheduled to release its monetary policy on 6th August where we expect no change in policy rates. Read our note on policy expectations. Credit spreads were stable in pre-policy week.RBI moratorium decision will weigh on Banks, NBFCs and HFCs bond spreads movement.
In the first fortnight of June 2020, Commercial Paper issuance rose 32% by Rs 686.92 billion against Rs 521.56 billion in the second fortnight of May 2020. Higher surplus system liquidity and lower benchmark interest rates pulled down CP rates. In the last one month, A1+ NBFC CP yields came down by 130 bps to 4.6%.
In March-April 2020, RBI provided banks TLTRO liquidity of Rs 1.128 trillion, Banks were required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market, including from mutual funds and NBFCs.I
Post Franklin Templeton issue, and failure of NBFC TLTRO, RBI has decided to provide Rs 500 billion Special Liquidity Facility for Mutual Funds (SL-MF). RBI will conduct repo operations ( from 27th April-11th May) of 90 days tenor at the fixed repo rate of 4.40%.
The market reaction to Franklin Templeton shutting down funds for a total of Rs 280 billion in AUM was a sell-off in financial stocks led by the largest NBFC in India, Bajaj Finance that fell 10%.
In the Union Budget 2020-21, the limit for FPI in corporate bonds was increased to 15% of the outstanding stock of corporate bonds which was 9% earlier.However, the budget is not seen as addressing the issues of growth and of frozen credit markets in any substantial way and this will keep credit markets frozen.
Credit Spreads rose after RBI’s statement on conducting Operation Twist for the second consecutive week. The purchase of 10-year benchmark bond is keeping yields on the bond artificially low and this is leading to spreads rising, as yields on other bonds are almost flat
Yes Bank bond spreads are trading at levels of 450 bps to over 500 bps on the back of deterioration in the bank’s balance sheet that led to rating downgrades. Read our note on Yes Bank Perpetuals. The credit market is risk averse with spreads between the PSU Bonds and all other bonds at higher levels.
Yes Bank bond spreads are trading at levels of 450bps to over 500bps on the back of deterioration in the bank’s balance sheet that led to rating downgrades. Read our note on Yes Bank Perpetuals. The credit market is risk averse with spreads between the PSU Bonds and all other bonds at higher levels.
3 year bonds are trading at spreads of 100 bps for PSU issuers (Non REC-PFC) while top quality low credut risk NBFCs bonds are trading at 145bps spreads Such sreads look extremely attractive on the yield curve, given low interest rates and liquidity infusing measures by the RBI.
In the Union budget 2018-19, the government showed its intentions to consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market and A grade rating corporate bonds as eligible for investments.
10 Year SDLs and 10 Year AAA Corporate Bonds are trading at almost similar spreads of 55-60 bps against the benchmark 10 year g-sec. SDLs are perceived as risk free given States access to the central government and RBI for funds to meet debt obligations, if required.
Manufacturing sector Commercial Papers (CP) 3 months, 6 months and 12 months maturity yields are at levels of 6.68%, 7.30% and 7.70% respectively. NBFC Commercial Papers (CP) 3 months, 6 months and 12 months maturity yields are at levels of 7.27%, 7.55% and 7.90% respectively.