Secondary market to remain active

CORPORATE BONDS

There are no major issues likely in the primary market this week as yields on the benchmark government securities have firmed up following the Reserve Bank's decision to raise the reverse repo rate.

Moreover, banks are eager to offer credit rather than arrange bond issues for the fear of holding them in their portfolios and marking them to market at a loss.

However, there is a huge supply of bond issues expected from banks in preparation for meeting the Basel II capital norms.

The RBI provided additional leeway to banks to raise more capital to Tier I by permitting them to transfer provision towards investment fluctuation reserve (IFR) maintained in excess of the stipulated five per cent of the investment portfolio.

Tier II bonds could be 50 per cent of the Tier I capital. The secondary market will continue to remain active as insurance companies and provident funds are likely to stock up high-yielding bonds.

The usual rush for the working capital has been on as corporates prefer to meet their capital requirements through short-term borrowings and then rolling it over.

This is because both loan and bond rates have gone up, thus pushing up interest rates.

Recap: The spread between a five-year, triple A corporate bond and an underlying government security has shrunk to 40 basis points owing to increasing yields of government securities.

A total number of 1585 commercial papers amounting to Rs 15,199 crore have been issued for the fortnight ended April 30. The rate of interest on CPs has come down to 5.5-6.65 per cent as against 5.55-6.33 per cent a fortnight before.