Corporate bond yields decline over the years: CARE Ratings

Key highlights:

• Ratings drew inferences on the prevailing risk scenario for these securities 
• Debt markets are more responsive to the interest rate changes
• Spread of corporate bonds over G-Secs narrowed further in Dec ’17

The movement of corporate bond yields in the secondary markets has been captured by CARE’s Corporate Bond Monitor, which also drew inferences on the prevailing risk scenario for these securities and the cost of funds for corporates over time. 

The inferences drawan on the prevailing risk scenario are: 
 
The movement of Corporate Bond Yields shows that yields have declined over the years - from an average 9.44% in 2014 to 8.54% in 2016 and 8.30% in 2017, indicative of the steady decline in cost of funding via bond markets for corporates in recent years, in line with movements in policy rates which has declined over the years. 

Repo rate have been cut by 50 bps since April’16 (6% in Dec’17), while average corporate bond yields have fallen by 61 bps since then  and bank base rate has seen a 35 bps decline (to 9.15% in Dec’17).   
 
The comparison of ‘banks average returns on advances' (which is the average interest rate paid by borrowers) with the movement in ‘average yields of corporate bonds’, shows that the average corporate bond yields  are lower than the  interest rates paid by borrowers from banks. 

This implies that the debt markets are more responsive to the interest rate changes. To put it in perspective, the banks return on advances was 10.42% in FY12 which declined to 8.86% in FY17, while average corporate bond yields was 9.74% in FY12 and 8.40% in FY17.     

The movement of the index of Corporate Bonds spread over GSecs, shows that the spread of corporate bonds over G-Secs narrowed further in December’17. The weighted average spread in December’17 (across maturities) at 1.09% was 11 bps lower than that in November’17 and 51 bps lower than that in October’17. 

The lower spread indicates that higher rated corporates viz. the AAA and AA rated bonds (which account for 70% and 21% respectively of total traded volumes) can borrow at finer spreads over GSecs. It is also reflective of the improvement in risk perception of the higher rated corporate bonds.  
 
The average spread of corporate bond yields over G-Secs in December’17 differed across tenures. It was lower for the longer duration tenures. For the tenure of 15 years and 10 years it was 0.58% and 0.57% respectively, 1.40% for 5 years and 1.20% for 1 year.      
 
The movement of yield spread of corporate bonds over G-Sec has seen considerable fluctuations in the ongoing fiscal. An increase in yield spread during a month was seen to be invariably followed by a decline in the subsequent month. 

It rose from 1.3% in April’17 to 1.9% in May’17 and declined in the next 2 months to 1.35% and 1.25% respectively. It thereafter rose to 2.04% in August’17 and fell to 1.41% in September’17 to rise again to 1.60% in October’17 and fell thereafter to 1.20% in November’17 and 1.09% in December’17.

The average spread of corporate bonds over G-Sec in 2017 (Apr-Dec) at 1.50%, is the highest since 2011. The average yield spread has seen a sustained increase since the last 4 years (Apr-Dec) rising by 90 bps during FY14 to FY18.   
 
In terms of traded volume, the 15 years corporate bonds accounted for 4%of the aggregate trades during Apr- Dec’17. The 10 years, 5 years and 1 year bonds accounted for 9%, 11% and 13% of the trades respectively.   
 
Total traded volumes of corporate bonds stood at Rs 10.04 lakh crore in the 9 months period Apr-Dec’17, 47% higher compared with the Rs 6.83 lakh crore traded in the corresponding period last year.