Short-tenor corp bonds dominate market

While corporate bond offerings in the tenors between two and five years have seen a sharp rise this financial year because of higher interest rates, issuers have not been keen on locking funds for longer durations for the same reason.

According to data provided by the Clearing Corporation of India (CCIL), almost 50 per cent of corporate bond offerings were in the 2-5 years tenor in May, up from 37 per cent in the previous month and 27 per cent in the corresponding period last year.

The average coupon rate on the offerings in the 2-5 years tenor was 9.02 per cent in May and 10.95 per cent in April — up from the 8.17 per cent in the year-ago period. "Owing to high interest rates even if issuers want long-term funds, they are settling for short-term bonds,” said an official from a brokerage firm that arranges debt issuances.

Floating rate issuances also increased in May, as there was an uncertainty on the trajectory of interest rates. The share of floating rate securities in the total offerings was higher at 40 per cent, compared to 29 per cent in the previous month. “In May, the market was divided on whether the Reserve Bank will hike policy rates or will take a pause in the mid-quarter review. Hence, in order to hedge against the interest rate movements, issuers settled for floating rate instruments,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. The Reserve Bank of India raised policy rates by 25 basis points in the mid-quarter review held on June 16.

Finance companies were the dominant issuers in May with 87 per cent, followed by infrastructure companies and manufacturing companies.

Investors also wanted to take advantage of high interest rates and hence are not willing to invest in long-tenor bonds. According to CCIL, in April and May there were only 12 corporate bond issuances in the tenor, ranging between 10-15 years.

Typically, insurance companies and pension fund managers are major investors in long-tenor debt instruments. “Investment decisions depend on the funds profile of insurance companies. If traditional products dominate the profile, then long-tenor investments are preferred while high-yielding investments will be preferred for a ULIP dominated funds profile,” said SP Prabhu, vice president-fixed income, IDBI Federal Life Insurance.

Currently, unit linked products (ULIPs) comprise around 70 per cent of total product mix of insurance companies, which explains their investment preference. “Going forward, we expect the short-term rates to stay elevated for a few months,” said Prabhu.