fixed assets: relative to global bond yields, Indian yields haven’t risen much: B Prasanna
B Prasanna, Head – Global Markets and Proprietary Trading Group,
What is the correlation between bond yields and corporate bonds giving such high annualized rates?
I have a slightly different take on that. Obviously, there will be a very strong correlation with the government bond yields that are trading in India as well as with what is happening in the rest of the world.
Many bonds in global markets have historically yielded higher and higher yields. They talk about US Treasuries as well as UK gilts and German bunds where all yields have gone up and this is mainly due to global central banks raising rates. So that’s point number one. Global bond yields are rising and along with that, Indian Treasuries are also expected to rise. But having said that, I would also like to point out that compared to the kind of upside move we’ve seen in global bond yields, Indian yields haven’t actually risen as much.
Just to make a comparison, this calendar year US yields would have probably gone up 300 basis points, but the Indian 10-year yield went up about 100 basis points. To some extent this is due to the fact that the Reserve Bank actually raised the repo rate by 190 basis points, but this is also combined with the fact that Indian insurance companies, provident funds and the banking system have recovered such long duration bonds.
When it comes to corporate bonds, so-called AAA corporate bonds trade much lower than credit spreads in the market. Your story refers to NBFCs obviously always borrowing at a slight premium to what happens to AAA manufacturing and even those NBFCs actually announced some of those bond issues in order to attract high net worth individuals and some of between them. these are characterized as market-linked debentures where the taxation on some of these debentures held by the HNIs is converted into capital gains. If they hold it for more than a year, they also benefit from indexation.
Overall, a mix of higher global bond yields, higher Indian Treasuries and lower liquidity as tight liquidity drives up the cost of funds. Combined with this, market-linked debentures allow companies to tap into HNI segments that seek higher after-tax returns for their investments.
How risky is it if we talk about it as a more lucrative asset class than FDs?
Here we are comparing chalk and cheese when talking about fixed deposits. These yields are currently rising gradually due to liquidity tightening, but the highest deposit today is still in the 7-7.25% region.
Non-bank financial companies certainly do not have the same credit quality. They are two completely different credit instruments and if an investor at the retail level is considering investing in this type of debenture versus a bank term deposit, he obviously needs to be aware that there is a difference in view of credit risk.
They are two different instruments and if we compare the debentures issued by these finance companies and the deposits they raise themselves, then we can say that the credit risk is more or less the same and the difference could be whether you tie up your money for a fixed period of three years, five years or place it in a liquid instrument which will give you the possibility of reselling it.
From this point of view, debentures also offer many advantages. It provides liquidity in addition to giving a yield recovery. In the beginning, even a tax benefit comes with an investment in the MLD type of debentures. All in all, it’s a different risk-reward spectrum we’re talking about.
It is up to each investor to decide which spectrum or which part of the risk-reward scale they actually fall on and, therefore, they should take that view.