Corporate Bond Yields and Liquidity Deficit
Despite the Reserve Bank of India’s (RBI’s) recent decision to cut the repo rate by 25 basis points, corporate bond yields are rising due to a persistent liquidity deficit in the banking system. This has been a trend for the past nine months.
Factors Contributing to Rising Corporate Bond Yields
- Liquidity Deficit:
The net liquidity in the banking system was at a deficit of ₹1.8 trillion as per the latest data from the RBI. - Increased Corporate Bond Supply:
Companies are issuing more debt to raise capital, which puts upward pressure on yields. - Yield Spread Expansion:
In February, the yield spread between corporate and government bonds expanded by 25 basis points.- Short-term bond yields rose more sharply, resulting in an inversion of the yield curve.
- The yield on a five-year AAA-rated corporate bond was 7.46%, while a 10-year AAA-rated bond was 7.30%.
- Investor Preferences:
Investors are favoring long-term instruments to lock in yields, contributing to the inversion. - Global Factors:
Concerns over potential US tariffs on India and heightened UST yield volatility have affected yields.
Government Bond Yields
- Stability:
The yield on the benchmark 10-year government bond was stable at 6.69%. - RBI's Role:
The RBI has been purchasing government securities via open market operation (OMO) auctions, totaling around ₹60,000 crore.
Corporate Debt Market Outlook
- Future Supply:
Major banks like Bank of India, Punjab National Bank, and State Bank of India are expected to issue more bonds, likely increasing corporate bond supply and pressure on yields. - Risk Premium:
The widening yield spread reflects the growing risk premium investors demand for holding corporate debt relative to government securities.
