The bond market in India is experiencing a significant shift, with top companies such as Housing and Urban Development Corp (Hudco) and Bajaj Finance withdrawing their proposed bond sales due to elevated yields. The yield on 10-year benchmark government bonds has surged to a five-month high, reaching 6.60% on Tuesday, which is influencing the cost of borrowing for corporates and bank lending rates. This increase in yields is attributed to fears of higher supply of bonds due to GST rationalization and a shift in monetary policy.
As a result, companies are finding it more expensive to borrow from the markets. Hudco, for example, withdrew its bond issue after coupon bids on its three-year bonds were at least 10 basis points higher than what it was willing to pay. Bajaj Finance also withdrew its 10-year bond issue of ₹5,000 crore due to higher-than-expected yields. Instead, Hudco opted for a term loan from a public sector bank, which is a more expensive option.
The rise in yields is not only affecting companies but also state governments. Maharashtra, for instance, did not accept any amount for its bonds of four varying maturities at Tuesday’s weekly auction. Other states are also being forced to borrow at higher rates, which could lead to increased borrowing costs.
Market participants attribute the cautious market outlook to the pricing of corporate bonds, which are typically priced at a spread over government securities of similar maturity. AAA-rated bonds of public sector undertakings like Hudco are seen as quasi-sovereign and usually have a higher demand. However, the current market conditions are making it challenging for companies to issue bonds at favorable rates.
The end of India’s bond rally is expected to continue, with yields likely to remain elevated due to the anticipated higher supply of bonds and the shift in monetary policy. This could lead to increased borrowing costs for companies and state governments, making it more challenging for them to access funds from the markets. As a result, companies may need to explore alternative funding options, such as term loans from banks, which could be more expensive.