Corporate bond yields ease on demand from mutual funds, insurers

By Manish M Suvarna

Yields on corporate bonds eased marginally in a week across tenors due to a strong appetite from mutual funds and insurance companies. Additionally, banks have also been buying these papers in the secondary market due to the surplus liquidity in the banking system.

Yields on corporate bonds maturing in three years moderated 5-7 basis points, but rebounded marginally after some investors booked profit on Thursday. The yields on 10-year corporate bonds moderated 4-5 basis points. Yields remained mostly unchanged on Friday.

‘As we see, the stability in markets and flows in mutual funds and insurance, it’s a demand-led recovery in corporate bonds. People so far were sitting on the sidelines, but now have started making investments. G-Sec yields also stabilised and the last couple of auctions sailed smoothly without any devolvement and lower underwriting fee, sensing demand-led recovery,’ said Ajay Manglunia, managing director and head – institutional fixed income at JM Financial.

Market participants said mutual funds were actively buying shorter-tenor papers, while pension funds and insurance companies were purchasing longer-tenor bonds.

The yields on bonds of National Bank for Agriculture and Rural Development maturing in April 2024 were trading at 5.10% at the start of the week, but moderated to 5.05%-5.03%, dealers with brokerage firms said. The yields on longer-tenor papers issued by Indian Railway Finance Corporation were hovering between 6.84% and 6.87%, but eased to 6.80%-6.81% by the end of this week.

Dealers with companies active in the market said the sentiment of investors has also improved because the inflation print was significantly lower. The CPI Inflation for August came in at 5.30%, lower than what the market has expected, due to moderation in food prices along with the high base effect.

‘Inflation momentum has softened significantly over the past two months. The latest CPI print was 30-40 basis points below the Street’s expectation. Softening inflation momentum should ease some pressure on the RBI and the pace of normalisation could be much slower than what was anticipated 2-3 months back,’ said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Additionally, yields had also taken cues from the fall in US Treasury yields early this week after better-than-expected inflation data. Surplus liquidity in the banking system also played a role in keeping yields on these papers down as banks were also seen active on the buying side. Currently, liquidity in the banking system is estimated to be in a surplus of around `7.24 lakh crore.

Meanwhile, dealers with brokerage firms said that the comments by RBI deputy governor Michael Patra on Thursday did not impact yields. This was because a similar thing was said by the RBI governor in the monetary policy.

Patra said liquidity absorption by the central bank and variable rate reverse repo auctions should be not be considered as policy normalisation.