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By Manish M Suvarna
Corporate bonds yields across tenures and ratings surged sharply during the week, tracking the movement in yields on government securities after the government in the Union Budget announced higher-than-expected market borrowings next fiscal year. Yields on 10-year corporate bonds in the secondary market rose by 15-20 basis points, while those on five-year and three-year bonds saw a rise of 20-25 basis points.
Similarly, the yield on benchmark securities rose nearly 20-25 basis points and touched a 30-month high since the start of the week. The benchmark yield ended marginally down on Friday at 6.8789%. “The recent spike in corporate bond yields was post G-Sec yields moving up in reaction to the large borrowing programme. Yields will continue the upward trend as markets are expecting a change in stance and rise in reverse repo rate in the forthcoming policy,” said Anand Nevatia, fund manager, Trust Mutual Fund.
In the Union Budget, the government has projected market borrowings of Rs 14.95 lakh crore and net borrowing of Rs 11.2 lakh crore to bridge the fiscal deficit gap. The market had expected the government to borrow between of Rs 12.50 lakh crore and Rs 13 lakh crore. This has created jitters in the market, pushing yields on these papers to a multi-year high.
The rise in yields on both government and corporate bonds has also resulted in a narrowing of spreads. Currently, the spread between a 10-year corporate bond and government securities is around 40-45 basis points, compared to 70-80 basis points earlier.
Market participants said rising yields on corporate bonds will lead to lower issuances. Corporate bond yields across ratings and tenures have already seen a rise of 30-40 basis points in December following the uptick in G-Sec yields.
Yields are expected to rise in the coming days considering the higher borrowing, rising inflation, and Fed’s announcement on interest rate hike and on tapering its bond purchase programme. At home, the Reserve Bank of India (RBI), too, has withdrawn liquidity from the markets.
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