The Hindu Business Line : Corporate bonds losing sheen

Corporate bonds such as that of Indian Bank's Tier II bonds of Rs 200 crore plus Rs 100 crore greenshoe option with a coupon rate of 6.15 per cent and 6.25 per cent have been open from June 23, National Textile Corporation's Rs 200-crore issue with a coupon rate of 6.15 per cent has been open since June 16 and Jindal Stainless Ltd's maiden issue of Rs 200 crore with a coupon rate of 6.90 per cent has been open since June 22.

According to issue arrangers, so far Indian Bank has received subscription of about Rs 150 crore, National Textile Corporation Rs 61 crore and Jindal Stainless Rs 130 crore.

"These issues are not very attractively priced considering the way G-Sec yields have risen over the last week or so. They will get mostly subscribed through phone calls between senior officials,'' said an arranger to one of the issues.

Rising domestic inflation and impending US interest rate hike are among the factors unsettling market players.

According to Mr Piyush Garg, Vice-President & corporate bond dealer, I-Sec, "mutual funds have sold Rs 500-600 crore worth of corporate bonds over the last 3-4 weeks." Mutual funds, which have been facing redemption pressure for sometime now, were earlier selling gilts and ended up being over-weight on corporate bonds. So whatever redemption happened lately and what will happen in the days to come will be met through sale of corporate bonds.

Said Mr A. Balasubramanian, Head (Fixed Income), Birla Sun Life Asset Management Company Ltd, "Corporate bonds usually form part of the portfolio of income funds, short-term fund and sometimes monthly income plans. Since assets under management of these funds are falling because of market conditions, fund managers are choosing to exit from corporate bonds.

In terms of discipline of allocation, government paper is preferred to corporate bonds. Mutual funds are maintaining higher cash reserves of about 20 per cent of the portfolio in view of the current market."

The negative sentiment pervasive across the market has increased the spread of corporate bonds yields over that of government securities of comparable maturity from 60-70 basis points seen just a month ago to 100-120 basis points now.

With the outlook bearish, players want to keep their positions light, said Mr Garg.

The rise in the spread is typical in a bearish market and reflects the increased premium that corporates have to pay for the lesser liquidity of their papers vis-à-vis that of sovereign Government of India paper.