Issue rush in bond market

Fixed-rate coupons for long-term money.

For the first time in the current financial year, banks, financial institutions and public sector undertakings are entering the debt market with fixed rate coupons for longer maturity money.

This indicates that issuers are taking a bet on raising long-term money at fixed rates of interest. Bond dealers said this rush of issues also indicated issuers believed that interest rates had stabilised.

According to debt dealers, Power Finance Corporation and Housing Development Finance Corporation will hit the market on Friday with triple-A rated 5-year bonds.

The others in the pipeline include tier-II issues of Syndicate Bank, Industrial Development Bank of India and Infrastructure Development Finance Corporation.

Debt market dealers said the issuers expected to raise around Rs 900 crore.

"The yield on the 10-year gilt is now around 6.70 per cent, which is 50-55 basis points lower than its peak level of 7.25 per cent in November 2004. "Nobody wants to miss the bus," said a debt dealer.

While the yield on the five-year government security is 6.36 per cent, the Power Finance Corporation is raising Rs 100 crore at a 7 per cent coupon. The issue has a greenshoe option. HDFC is raising Rs 200 crore at 6.95 per cent.

Dealers said the recent surge of liquidity in the market is helping the banks and institutions raise funds at a spread of 50-60 basis points over sovereign paper of the same maturity.

The illiquidity in the corporate debt market a few months back had resulted in the spreads going up to as high as 100-120 basis points.

Syndicate Bank is aiming to mop up Rs 150 crore for a 10-year period while IDBI and IDFC are expecting to raise Rs 200 crore for five years. The interest rates on these issues is yet to be decided.

Primary issues floated in the early part of this year mostly carried floating interest rates. There is a shortage of fixed rate papers in the market and the outstanding papers available in the market with the banks and mutual funds primarily carry floating rates of interest.

The corporate debt market has rallied following the relaxation of the foreign institutional investor ceiling (which was reimposed after two days) and most of the domestic institutions offloaded their papers to the FIIs at that time.

Dealers said another reason the institutions were hitting the market was that demand from the provident funds for investment generally came in January.

Debt dealers added that even as the borrowing programme of the PSUs and banks were approved long ago, the volatility in interest rates held most of them back.

Cashing in on the dip in rates

• At least 5 issuers, including three financial entities, plan to enter the debt market in the near future
• Bonds priced at 6.95-7%
• Players looking at issuing fixed-rate bonds, indicating they believe interest rates have stabilised
• Long-term investors such as insurance companies have an appetite for fixed-rate paper
• Low stock of fixed-rate paper in the market