This means these bonds have become less risky and are at the same level of risk before the onset of the pandemic COVID-19, leading to a virtual standstill of economic activity. These spreads are unlikely to widen further and the corporate bond market may grow by 9.2 to 10 per cent, Icra said.
Apart from liquidity infusion measures announced by the regulator since the onset of pandemic, improved investor appetite for corporate bonds has also supported the decline in the spreads. Improved investor appetite is also reflected in strong bond issuance of Rs 2.2 lakh crore (+53 per cent on year-on-year basis) during July-September 2020 quarter, which followed an equally strong issuance of Rs 2.3 lakh crore during April-June 2020 quarter. With two robust consecutive quarters, the bond issuances rose to Rs 4.47 lakh crore during April-September 2020 (+174 per cent on YoY basis), Icra said.
“Though the targeted long-term repo operation (TLTRO)funding was largely utilised by the banks in Q1 FY2021, the momentum in bond issuance during Q2 FY2021 reflects improved appetite across investor segments” said Anil Gupta, sector head – financial sector ratings, Icra. ” Given the regulatory stance of maintaining accommodative stance of monetary policy and surplus liquidity environment, the issuances could remain strong and spreads are likely to remain narrow over the next few quarters.”
With the spreads now below the daily average for the last five years, the scope of further decline, if any, remains limited. The yield on 10-year G-Secs has been below 6.0 per cent and reverse repo at 3.35 per cent. Yields on corporate bonds have also declined across various rating categories and tenure during the last six months. Despite the decline in yields, corporate bonds remain attractive in relation to other alternatives. This has also resulted in improved demand from investors, thereby helping in reducing spreads.
“With improved investor appetite and vibrancy in the debt capital market, the certainty on availability of funding at competitive rates has improved. This could also reduce the need for maintaining high on-balance sheet liquidity by corporates and non-banks as was witnessed during first half of FY’2021, amid the prevailing uncertain funding environment,” Gupta said.
Fresh bond issuances are expected to rise to Rs 8-8.2 lakh crore during this fiscal from Rs 6.55 lakh crore during FY’2020. With estimated redemption of Rs 4.95 lakh crore in FY’2021, the volume of corporate bonds outstanding is estimated to rise to Rs 35.5-35.8 lakh crore, translating into a YoY growth of 9.2-10 per cent for FY’2021.