Corporate bond issuances fall 22% in August as firms await Fed rate cut

Issuers hold back, eyeing lower borrowing costs after Fed cut

Corporate bond issuances fell by around 22 per cent in August, despite easing yields, as issuers delayed raising funds while awaiting the US Federal Reserve’s (Fed’s) likely interest rate cuts starting this month.

Corporates and financial institutions expect further declines in yields and reduced borrowing costs, according to market participants.

The Fed is widely expected to lower interest rates by 25 basis points in its meeting on September 17-18, marking the beginning of a downward interest rate cycle.

Indian companies and banks raised Rs 81,238 crore in August compared to Rs 1.04 trillion in July, according to data from PRIME Database.

 

Overseas corporate bond issuances also saw a decline during the month, with only one issuance of Rs 100 crore by Muthoot Microfin.

“The Fed has been vocal about a policy shift towards rate cuts, and issuers who primarily issue longer bonds are awaiting an easing in yields to avoid paying higher rates for extended tenures,” said Ajay Manglunia, managing director and head (investment grade group) at JM Financial.

“Given the expectation of falling interest rates, market participants are being cautious and not rushing to issue bonds, even though yields have improved and are expected to decline further,” he added.

Data from the PRIME Database showed that in August, State Bank of India led the mobilisation chart with Rs 7,500 crore, followed by REC with Rs 6,820 crore, Bank of Baroda and National Bank for Agriculture and Rural Development (Nabard) with Rs 5,000 crore each.

National Bank for Financing Infrastructure and Development issued bonds worth Rs 3,911 crore during the month. These top five issuers accounted for around 34 per cent of the total amount raised.

The yield on AAA-rated 10-year corporate bonds fell by 3 basis points (bps) in August, while that on five-year bonds softened by 2 bps. The benchmark 10-year government bond yield decreased by 6.6 bps over the same period.

Market participants expect shorter-term bond issuances might increase this month as yields on shorter-term bonds are expected to decline further following rate cuts, which could steepen the yield curve.

They also expect a sizeable rise in bank infrastructure bond issuances in the coming months.

“In the second half of the year, we expect a surge in issuances, particularly from banks, as well as large corporations tapping into the market. Infrastructure bonds will also be prominent, followed by Tier-II and Tier-I bonds,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. “While supply will be ample, lower credit entities may struggle more,” he added.

In the first quarter of the current financial year (2024-25), corporate bond issuances fell by around 56 per cent compared to the same period in the previous financial year, largely due to the absence of major issuers. Power Finance Corporation, one of the largest issuers, raised fewer bonds during the quarter compared to Rs 45,130 crore in the previous financial year.

Nabard was the largest issuer in the previous financial year, raising Rs 65,393 crore.