Secondary market in the limelight

OUTLOOK: Corporate bonds

The primary bonds market witnessed an issue from the Industrial Development Bank of India (IDBI) to raise Rs 400 crore through floating rate bonds with a greenshoe option.

The secondary market was active as most banks are interested in picking up short tenure corporate bonds "" both to benefit from the interest rate yield differential and to avoid risks on the government securities portfolio.

Some leading corporates such as Hindalco, Tata Motors, Tata Power, Indian Railway Finance Corporation and Associated Cement Company have shifted to rupee borrowing, said merchant bankers.

Lack of yield differential is shooing away investors from floating rate bonds "" both government paper and corporate debt. Last week, in active benchmark corporate bonds like that of Housing Development Finance Corporation, the spread over comparable gilts was negative.

According to dealers, most of these benchmark papers carry floating rate of interest and thus the yield differential "" which a market player earns as a spread "" turns negative.

Last week, the floating rate 11-year bond was trading at 5.10 per cent whereas a fixed rate government security, the 7.38 per cent 2015, was at 6.03 per cent "" a negative spread of 93 basis points. Similarly, a 5-year floating rate bond of HDFC is offering 5.41 per cent whereas the fixed rate bond is at 6.68 per cent.

Commercial paper

Commercial paper market was active last week as most corporates are in a fix over the route for taking working capital loans. Although most public sector undertakings have obtained approval from their respective boards to borrow from the debt market, the illiquidity in the market has forced them to postpone their borrowings.

Investments by banks in commercial paper has gone up by Rs 158 crore since August 6, 2004 to stand at Rs 3,374 crore. Investments were to the tune of Rs 3,215 crore a fortnight back.