No takers for short-term corp debt
Credit spreads for three-month to one-year corporate debt widen by 50-75 basis points on lack of demand.
Credit spread is the yield differential between yields of government and corporate debt papers. The traded volume in corporate debt segment fell from Rs 703.90 crore to Rs 484.21 crore for the week ended March 4 2011, on the National Stock Exchange , according to RBI data. Analysts say, spreads have widened due to the squeeze in the systemic liquidity and their balance sheet needs, which has forced banks to borrow from the markets at 9.45% to 10.15% yields in the threemonth to six-month paper segments , thus putting pressure on corporate bond yields.
Another reason is that investors are also sceptical about the liquidity of the corporate debt paper in a tight liquidity scenario . “One of the reasons why there is lack of appetite for corporate credit is investors are getting the best yields and top credit quality in these public sector undertaking, or PSU, bank papers. So they don’t want to take the credit call. Liquidity of the paper is another reason why investors are not showing any interest, since there might not be many buyers in a situation where liquidity is in the deficit mode,” says Ajay Manglunia, senior vice-president of Edelwiess capital.
Yet another reason for the distortion of spreads has been that RBI has bought government bonds worth about Rs 70,000 crore in the last three months, which has suppressed government bond yields. After almost having done away with open market operations, or OMOs, RBI has once again resumed using the instrument to infuse longer term liquidity in the system. Government bonds can be repurchased from the central bank through its repo facility, but repo in corporate debt is still to take off, since it is saddled with intermediate funding issues.
The higher cost of funds for funding corporate bonds has also gone up with a rising interest rate regime, as well as the repo rate (6.75%) that has remained at the operative rate for sometime, which has led to a loss of appetite for even the medium-term corporate debt papers. “The cost of funds for the unsecured market, or the clean market, has shot up higher than the repo rate, even as the repo rate has scaled higher ,” says a senior official from Morgan Stanley Primary Dealership .