Corporate bonds will need to offer better yields to compete with government bonds: report

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Corporate bond issuers in India will have to offer higher yields on their papers as they compete with government issued government bonds. At the same time, rising yields on these bonds have led to a general decrease in the number of bond issues, experts said, as reported by the Mint.

“Corporate bond issuance has fallen amid rising G-sec rates. Investors are looking for higher yields, and they believe yields will rise further from here. There is also a more State Development Loans (SDLs) available at higher yields, so investors prefer a higher yielding instrument,” said Ajay Manglunia, Managing Director and Head of Institutional Fixed Income, JM Financial, at Mint.

AAA-rated three-year corporate bonds increased their yields to 5.74%, up 43 basis points (bps). At the same time, AAA-rated five-year corporate bonds also saw their yield increase by 36 basis points to 6.35%. As a result, the volume of corporate bond issues declined. Corporate bond issuance fell to 5.93 trillion rupees in 2021 from 7.87 trillion rupees in 2020.

But the expected rise in interest rates throughout the year could still shake the bond market. A rise in interest rates causes yields to rise, even if bond coupon prices would fall as a result.

“Our rates team expects the yield on 10-year government bonds to reach 6.75% by the end of 2022 and to reach 7% by 2023, from 6.5% currently. Yields are expected to rise on tight global liquidity, rising rates and rising government deficits. India’s potential inclusion in the global bond index may provide some support,” he said. Nomura in a note to its customers.

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(Edited by : Thomas Abraham)

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