Secondary mart corporate bond volumes soar

Heavy trading in secondary corporate bond papers has seen daily volumes surge to Rs 150 crore.

This is as banks, provident funds and mutual funds are scouting to pick up corporate paper since primary issuances are negligible.

There has been a marked shift away from trading of government securities, and with rising demand for corporate paper, the spread between corporate debt and government securities of similar duration has been squeezed by about 45-50 per cent, said a trustee managing a large provident fund.

Nationalised banks have virtually stopped trading in government securities, fearing the need to provide for depreciation in the current quarter ending September.

Further, even as banks have discussed using funds from their investment fluctuation reserves (IFR), this is not likely to be sufficient to meet the losses nor could they be used for setting off profit and losses on the balance sheet, said a senior public sector bank official.

"Banks have started to sell their long-term triple A-rated paper as well as state-guaranteed paper, which is being lapped up by provident funds," said a senior fund manager. With higher yields in the secondary market, PFs are increasingly buying in the secondary market, he added.

Trading interest has thus shifted to the corporate bond market, whereby with lack of participation from public sector banks, daily volumes in the government securities market have fallen by 40-50 per cent from Rs 4,000-5,000 crore to Rs 2,000-2,500 crore in the last few days.

Trading in corporate bonds by the PSU banks is also triggered by good yield differential for the shorter tenure. The spread between triple A corporate bond and corresponding government security of similar maturity has reduced to 65 basis points (bps) from 75 bps two weeks back and 110 bps over a month ago.

Moreover, as there are no primary issues hitting the market, there are few corporate bonds in the maturity basket of two to three years. Banks are targeting this segment of bonds to bring down the average maturity of their trading portfolio.

"This will enable us to reduce the impact of interest rate volatility on our portfolio," said a senior banker.

With too much money chasing few instruments on account of the demand-supply disparity, spread between corporate bonds and government securities has fallen. This disparity is evident from the fact that while yields on government securities are rising, that of bonds are falling.

While banks trade in short term paper, provident funds cannot afford to buy short term paper and thus opt for paper of five to seven year maturiry and beyond.

Nevertheless, despite rising demand for corporate paper, yields have in the last few days fallen by almost 20 bps. This is on account of the liquidity overhang in the system since investors prefer to keep funds in highly liquid papers of three to six months maturity.

The benchmark five year HDFC paper is today trading at 6.85-90 per cent as against a high of 7.02-05 per cent a week ago. Some of the heavily traded corporate papers also include five year bonds of Power Finance Corporation and Indian Railway Finance Corporation.