Yield differential to spur demand

OUTLOOK/ Corporate bonds

While the primary market has no fresh issues lined up this week, there is expected to be demand for bonds in the secondary market. There has been good demand for corporate bonds in view of the yield differential compared with corresponding maturity government papers.

However, dealers said trade will be concentrated on direct deals among market players without contract notes till there is a clarification from the government on payment of transaction tax on deals done on the exchange platform.

The benchmark 5-year bond of Housing Development Finance Corporation is understood to have the largest floating stock in the market. Lacklustre trading has pushed up yields, which has narrowed the spread between the 5- year government paper and the corresponding maturity paper to 90 basis points from 100 odd last week.

Life Insurance Corporation, IDBI, Central Board of Trustees were some of the aggressive buyers in the market. "Long-term investors could not have a better time as bonds are ruling at rock bottom prices," said a dealer in corporate bonds.

Infrastructure Development Finance Corporation is understood to be making rounds of the market for a fixed rate loan of five years at 6.10 per cent.

Six months back, the same corporate could raise funds at 5.40 per cent. Rural Electrification Corporation is also looking for raising funds with a floater issue.

CPs to stay chirpy

The commercial paper market is rife with activity as corporate borrowing has shifted to short-term issues. This is because, with the interest rates rising gradually, investors in the long-term bonds market (like banks) are eager to offer floating rates whereas corporates want fixed rate loans.

On the other hand, for fear of not being caught on the wrong side, banks and mutual funds are fighting for instruments with residual maturity of one year.