India’s corporate bond market has been pricing in greater risk in the past 10 days as the Covid-19 outbreak threatens economic activity.
The Reserve Bank of India’s (RBI’s) response to soothe nerves through indication of bond purchases by it hasn’t been able to make an impact. In fact, government bond yields rose on Thursday despite the central bank’s indication that it would buy ₹10,000 crore worth of bonds. This announcement comes on the back of dollar sell/buy swaps and long-term repos announced earlier.
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Jayesh Mehta, India treasurer at Bank of America Corp., says RBI needs to take more measures. “The market feels that the OMO was not enough. We surely need more measures,” he said. OMO stands for open market operations.
When risk-free bonds ignore policy measures, riskier corporate paper are likely to price in more trouble ahead.
Ergo, corporate bond spreads have continued to widen even for AAA-rated paper. In fact, the yield on AAA-rated corporate bond has jumped more than that on the lowest investment grade rating of BBB, as the adjoining chart shows. For raising three-year money, AAA-rated companies have to shell out at least 6.8% now against a modest 6.3% two weeks ago. Those with AA rating have had to shell out at least 25 basis points more. Even the strongest balance sheets are having to shell out more to entice investors now.
The concerns over GDP growth are rising every day and the cut in growth estimates for India are casting a pall over corporate earnings.
The worry is this. Indian companies may be hit hard as the virus outbreak disrupts supply chains within the country as well as beyond borders. As manufacturers have less staff turning up, the effect on wages and therefore purchasing power could be negative. This means that non-banking financial companies (NBFCs) may find it a challenge to recover money or even find opportunities to lend. NBFCs dominate the bond market.
The virus impact comes just when the bond market was recovering from a prolonged liquidity crunch among NBFCs. The malaise in the bond market has increased after Yes Bank Ltd’s collapse led to the write-down of its additional tier-1 bonds by RBI. These were considered the most safest investments. “The mood is completely sour now. Until there is some series of measures by RBI, the sentiment is unlikely to revive,” said a bond investor requesting anonymity.
The central bank’s measures so far may have limited the damage from the foreign investment outflows. But for bond spreads to stabilize, the market may need more convincing that the economic damage would be contained.
