 "Insurers turn to govt bonds as safer investment bet")
Insurance companies are shying away from corporate bonds in a scenario when the Reserve Bank of India (RBI) surprised the market with a repo rate hike in the mid-quarter review of the monetary policy earlier this month. Insurance companies are primarily looking at government bonds as they are at least a liquid investment option.
The street expects that the rate hike cycle may continue due to high inflation because of which investing in government bonds will prove to be a safer bet. Since the time RBI tightened liquidity in mid-July in a bid to arrest the volatility in the rupee against the dollar, corporate bond issuances have dried up and cost of borrowing rose. Issue arrangers are not expecting primary issuances of corporate bonds to pick up unless liquidity improves. Though RBI has partially eased the liquidity, it has not helped the corporate bond market much.
"Insurers are going for government securities, so that they can book higher profits. In the current scenario, there is a difficulty in supply of corporate bonds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
"The yield of government bonds as well as corporate bonds rises when interest rates move up. But at least in case of government bonds insurers are safer," said a corporate bond issue arranger. He also added that this trend of insurance companies shying away is expected to continue for few more months.
Besides that corporate bond issuances have dried up as cost of borrowing for corporate have gone up. Nirakar Pradhan, Chief Investment Officer of Future Generali India Life Insurance said that corporate bond issuances are being deferred by companies due to the rising yields. However, he added that government securities’ rising yields have made the fixed income instruments attractive for both the insurers and customers.
Pradhan explained that while corporate bond issuances have been limited, in good papers like that of Rural Electrification Corporation (REC), the yields have touched 9.8 per cent.
The street expects that the rate hike cycle may continue due to high inflation because of which investing in government bonds will prove to be a safer bet. Since the time RBI tightened liquidity in mid-July in a bid to arrest the volatility in the rupee against the dollar, corporate bond issuances have dried up and cost of borrowing rose. Issue arrangers are not expecting primary issuances of corporate bonds to pick up unless liquidity improves. Though RBI has partially eased the liquidity, it has not helped the corporate bond market much.
"Insurers are going for government securities, so that they can book higher profits. In the current scenario, there is a difficulty in supply of corporate bonds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
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After the repo rate hike the yield on the 10-year government bond rose from 8.58 per cent to 8.71 per cent while the yield on the Fixed Income Money Market and Derivatives Association of India (FIMMDA) 10-year 'AAA' public sector undertaking corporate bond rose from 9.66 per cent to 9.85 per cent.
"The yield of government bonds as well as corporate bonds rises when interest rates move up. But at least in case of government bonds insurers are safer," said a corporate bond issue arranger. He also added that this trend of insurance companies shying away is expected to continue for few more months.
Besides that corporate bond issuances have dried up as cost of borrowing for corporate have gone up. Nirakar Pradhan, Chief Investment Officer of Future Generali India Life Insurance said that corporate bond issuances are being deferred by companies due to the rising yields. However, he added that government securities’ rising yields have made the fixed income instruments attractive for both the insurers and customers.
Pradhan explained that while corporate bond issuances have been limited, in good papers like that of Rural Electrification Corporation (REC), the yields have touched 9.8 per cent.