Corporate bonds

The price of AAA-rated PSU corporate bonds at G-Sec level on strong demand

Nine public entities have operated the bond market since November 2021, of which only NTPC and IOC were manufacturing entities.

By Manish M Suvarna

AAA-rated corporate bonds issued by public entities over the past few days have been priced at a level of government securities with a similar maturity due to strong investor demand. In addition, the lack of supply of bonds from public entities over the past three months has created a strong demand for these papers from large investors.

According to data compiled by Rockfort Fincap, 9 public entities have operated the bond market since November 2021, of which only NTPC and IOC were manufacturing entities. Usually, investors have a strong investment appetite for papers issued by PSU manufacturing companies.

Recently, corporate bonds issued by India Oil Corporation (IOC), with a duration of 5 years, were priced at 6.14%, which was lower than the yield of government bonds with a maturity of 5 years. in February 2027 traded on a secondary market.

Similarly, the Housing and Urban Development Corporation (HUDCO) has also priced its 3-year paper at 5.59%, which is almost on par with three-year government bonds.

“Many market participants had been holding cash since November 2021 in anticipation of a rise in reverse repos as well as a faster US Fed hike. So there was huge demand to buy assets because it was more of a carry game until March and even beyond unless RBI does not provide market support given the increased supply,” said Rahul Singh, manager Principal Fund Manager – Fixed Income, LIC Mutual Fund Asset Management.

Market participants said most of the demand for the bonds comes from, among others, provident and pension funds, which want to complete their investment quota in accordance with regulatory investment guidelines no later than 31 March 2022. Provident, gratuity and pension funds, insurance companies generally prefer to invest in bonds rated AA and above.

February’s monetary policy was a game-changer from a market perspective as they widely expected the central bank to take action on the repo rate given rising US Treasury yields and the rate hike path given by the US Fed.

Brokerage dealers say most of the top-rated large public banks are nearing completion of Tier II subordinated debt for the current fiscal year.

However, some PSU lenders are still issuing AT1 bonds given the lower prices in the market.