Rise in inflation a dampener

OUTLOOK/ Corporate bonds

While the primary market was on the verge of getting a load of issues from corporates and public sector companies, the surge in inflation to 7.51 per cent announced on Friday led to new issuers reviewing their plans.

Trading was confined to buying by insurance companies last week as banks were reluctant to churn their portfolio for the fear of booking losses.

To earn a good yield differential, there has been demand for corporate bonds. However, the lack of floating stock remains a big problem, dealers said. Except for the Housing Development Finance Corporation, there are no papers readily available. Though last week did not see much activity, the spread continued to remain as that of the week before.

Lacklustre trading has pushed up yields, resulting in the narrowing of spreads between five-year government security and the corresponding maturity AAA rated corporate bond to 90 basis points as against 100-odd basis points last week.

Life Insurance Corporation, Industrial Development Bank of India, Central Board of Trustees were among the aggressive buyers in the market.

CP in demand

The commercial paper market is rife with activity as corporates are preferring to meet their fund requirements through short-term funding.

With the Budget proposals yet to be cleared by Parliament and uncertainty in the debt as well as the equity markets, banks are willing to offer floating rates in the bond market while corporates are seeking fixed rate loans.

On the other hand, for fear of being caught on the wrong side, banks and mutual funds are fighting for instruments with one year residual maturity, which are in limited supply. One year commercial papers are being traded in the 4.85-4.95 per cent range.