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Corporate bonds will need to offer better returns to compete with govt bonds: Report

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The yields of corporate bonds have increased over the past year; as a result the issuance of corporate paper has fallen.

Corporate bonds will need to offer better returns to compete with govt bonds: Report
Corporate bond issuers in India will have to offer higher returns on their papers as they compete with state-issued government bonds. At the same time, the increasing yields on such bonds have led to a generally decreasing amount of bond issuance, said experts as reported in the Mint.
Corporate bond issuances have seen a drop amid rising G-sec rates. Investors are looking for higher yields, and they feel yields will go up further from here. There is also a larger quantum of state development loans (SDLs) available at higher yields. Investors, therefore, prefer a higher-yield instrument," said Ajay Manglunia, Managing Director and Head, Institutional Fixed Income, JM Financial, to Mint.
Three-year AAA-rated corporate bonds have increased their yields to 5.74 percent, a rise of 43 basis points (bps). At the same time, the five-year AAA-rated corporate bonds also have seen an increase in their yield by 36 bps to 6.35 percent. As a result, the volume of issuance of corporate bonds has been decreasing. Corporate bond issuance has dropped to Rs 5.93 trillion in 2021, from Rs 7.87 trillion in 2020.
But the expected hike in interest rates through the year may shake up the bond market once more. A rise in interest rates leads to increased yields, though coupon prices of the bonds would fall consequently.
“Our rates team expects the 10-year government bond yield to rise to 6.75 percent by end-2022 and further to 7 percent by 2023, up from 6.5 percent currently. The yields are likely to move higher on the back of global liquidity tightening, higher rates and higher government deficits. There can be some support from the potential inclusion of India in the global bond index," said Nomura in a note to its clients.
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