Borrowing costs

Borrowing costs rise again as low bond yields start to climb

If the resurgence of coronavirus infections gives a sense of deja vu, so does the yield curve in the bond market. Despite unprecedented policy measures over the past year, corporate financing costs have started to rise again.

Corporate bond yields rose across the curve, the fallout from tighter government bond yields and an increase in risk perception.

Analysis by CARE Ratings Ltd shows that the biggest increase was seen for housing finance companies.

In March, the average cost of borrowing on the bond market for these companies increased by 1.25 percentage points compared to the previous month. In fact, for some businesses, the cost of borrowing has exceeded that before the pandemic.

Show full picture

become more expensive

“The cost of borrowing for corporate bonds fell from 8.02% in March 2020 to 7.18% in March 2021. However, the rise seen over the past 2 months has limited the overall decline over the past year. 21,” said a note from CARE Ratings.

Does this mean that the Reserve Bank of India’s (RBI) liquidity measures have not worked? The answer is yes and no.

Excess cash kept the flow of funds undisturbed during the FY21 pandemic. Granted, bond yields for big and best companies are still far lower than they were a year ago. .

But the recent steady rise should worry businesses.

One of the reasons is that yields might not go down from now on. Of course, the RBI’s announcement to buy government bonds has depressed yields and this could have a salutary effect on corporate bond yields. But this impact is likely to be fleeting.

Corporate bond yields reflect the interest rate outlook and the underlying risk of the issuer.

This yield curve can swing upwards, thanks to two other curves: the coronavirus infection curve and the inflation curve.

The resurgence of the pandemic has heightened fears of containment, which could impact businesses.

In the meantime, inflationary pressures have also increased, meaning that the odds of a further easing in bond yields are low.

Short-term yields rose further as the central bank wants the curve to flatten.

Commercial paper rates have also started to rise. So far, rising bond yields are unlikely to impact net interest margins of non-bank financial corporations (NBFCs), analysts said.

However, if this persists, lenders may soon find that margins are under pressure. For other top-rated borrowers as well, decade-low yields are a thing of the past.

To subscribe to Mint Bulletins

* Enter a valid email address

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now!!