Invest more in government bonds
With high yields making the corporate bond market unattractive, investors are now eyeing government bonds. The big investors including fund houses, insurers and banks, are not only investing more in government bonds, but are also exiting investments in the corporate bonds.
The yield on the 10-year 'AAA' rated public sector undertaking corporate bond rose 9.90% from 9.58% at the start of this quarter. 'AAA' rating indicated highest safety. While the yield on the 5-year bond rose to 9.93% from 9.44%. Though yields of government bonds may drop from current levels due to Open Market Operation purchase of government bonds next week, the impact may not be much for corporate bonds.
Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund said, "Investors are selling their holdings because yields are rising. Investors resorted to selling corporate bonds because the relative value is going down. There will be more of sellers in corporate bonds as compared with government bonds after the announcement of Open Market Operation (OMO) by Reserve Bank of India (RBI)"
RBI governor Raghuram Rajan said on Wednesday that the central bank will conduct an OMO on Monday for a notified amount of Rs 8,000 crore to comfort the temporary strain in liquidity. Government bond dealers have been waiting for an OMO because of government bond auctions being held every week in November for a notified amount of Rs 15,000 crore taking the total auction size for the month to Rs 75,000 crore. Investors prefer government bonds as they are more liquid compared with corporate bonds.
According to an issue arranger of corporate bonds, there is not much appetite as yields of corporate bonds continue to trade high. There is also a fear that few companies may be downgraded in a slowing economy due to which investors are exiting from their corporate bond holdings. This includes traders, fund houses, insurance companies as well as banks.
Insurance companies, on the other hand, also argue that there is an absence of corporate bond issuances, which has necessitated the need to invest in government securities.
Badrish Kulhalli, Fixed Income Fund Manager, HDFC Life Insurance explained that whatever sale of corporate bond was happening, was merely to rebalance the portfolio. “They are not reducing positions,” he added. However, Kulhalli explained that with the high cost of borrowing from the bond market, corporates themselves prefer to borrow from banks.
Market players also said that there are some rising concerns from investors about the bond issuers being downgraded by the rating agencies. Downplaying this fear, Kulhalli said that while there are concerns, this is primarily for those issuances rated below the top notch ones.
Here too, he said that the number of issuances were very low, in the range of one to two in a quarter. With yields shooting up, these numbers are expected to come down further.
The yield on the 10-year 'AAA' rated public sector undertaking corporate bond rose 9.90% from 9.58% at the start of this quarter. 'AAA' rating indicated highest safety. While the yield on the 5-year bond rose to 9.93% from 9.44%. Though yields of government bonds may drop from current levels due to Open Market Operation purchase of government bonds next week, the impact may not be much for corporate bonds.
Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund said, "Investors are selling their holdings because yields are rising. Investors resorted to selling corporate bonds because the relative value is going down. There will be more of sellers in corporate bonds as compared with government bonds after the announcement of Open Market Operation (OMO) by Reserve Bank of India (RBI)"
RBI governor Raghuram Rajan said on Wednesday that the central bank will conduct an OMO on Monday for a notified amount of Rs 8,000 crore to comfort the temporary strain in liquidity. Government bond dealers have been waiting for an OMO because of government bond auctions being held every week in November for a notified amount of Rs 15,000 crore taking the total auction size for the month to Rs 75,000 crore. Investors prefer government bonds as they are more liquid compared with corporate bonds.
According to an issue arranger of corporate bonds, there is not much appetite as yields of corporate bonds continue to trade high. There is also a fear that few companies may be downgraded in a slowing economy due to which investors are exiting from their corporate bond holdings. This includes traders, fund houses, insurance companies as well as banks.
Insurance companies, on the other hand, also argue that there is an absence of corporate bond issuances, which has necessitated the need to invest in government securities.
Badrish Kulhalli, Fixed Income Fund Manager, HDFC Life Insurance explained that whatever sale of corporate bond was happening, was merely to rebalance the portfolio. “They are not reducing positions,” he added. However, Kulhalli explained that with the high cost of borrowing from the bond market, corporates themselves prefer to borrow from banks.
Market players also said that there are some rising concerns from investors about the bond issuers being downgraded by the rating agencies. Downplaying this fear, Kulhalli said that while there are concerns, this is primarily for those issuances rated below the top notch ones.
Here too, he said that the number of issuances were very low, in the range of one to two in a quarter. With yields shooting up, these numbers are expected to come down further.
No comments:
Post a Comment