Its Bonds not James Bond 007

Bonds the market when referred a decade ago in India was not that well developed as that of US and Uk .But over the years Government Of India has realized the importance of the bond markets .It has open market operations every now and then intervene by the GOI to maintain liquidity position in the market and also sometimes crunches the liquidity when excess of money supply is there in the system .Where the bonds are issued by the GOI and also by the corporate. But there are a lot of differences in both the bonds. It’s called as Gilts issued by the government and the other is the corporate bonds. 

 Expectations

It’s expected that there will be reversal in the interest rate cycle. But the question here is it really gonna happen?

Analysis

Because the Brent crude and the NYMEX crude prices have touched 10 months high $125/barrel & $109/barrel .Oil is the major commodity imported in the country so it is expected that this will lead to rise in the Petrol & Diesel prices there is loss on diesel per litre around Rs 11-Rs14 

Govt is bound not to increase the prices now as the state UP elections is on its ultimate leg so the prices will be increased as soon as the elections get over .The price increase can happen somewhere in the next week around if the situation gets worsen. The reason for this price rise is the supply from IRAN and the tension between Iran & Iraq that is build up over few weeks. So at the end who are the bearers the local people because they will have to bear and if the price rises then again it will affect the inflation. Inflation which everyone started to breathe as it was coming from its peak but Macro tensions are the factors where we are not expecting any rate cuts where 15^th march RBI policy is there.

So at the end rates are not gonna ease down.

So the shorter Maturity bonds tenure till 3 yrs wont see a sharp sharp decline in the yields.so the price will be little undervalued .But for the long term maturity bonds  its good too invest with the current scenario perspective. They are gonna give good returns in current scenario .Later when the situation comes under control if the rate cycle reverses then the yield in the short term bond maturity for three years will see a sharp decline in the yields where the price is expected to rise so good investment opportunity.

Corporate bonds carry higher credit risk compared gilts and offer higher yields. Lower the credit worthiness of a corporate bond higher will be the yield offering on the table.

Looking at the current situation where there are corporate governance issue and question on the issuing co’s whether they will be able to pay the Bond holders on due , for short term gilts are favorable but for longer term FY2012 second half corporate bond will have an upper edge.

The Gilt/Government bond

Off late the last budget fiscal deficit was to be estimated to be around 4.6% of the GDP and till now government has been unsuccessful to maintain its verdict .They have been borrowing heavily off late issuing bonds in the open market, banks ,institutions .The disinvestment plan of around Rs 40,000Cr is off track they have barely able to raise this year .The around estimate to Rs 4.7 lac Cr increase of Rs 52,800Cr. Despite this move the spread in the govt debt and corporate bond has been rising. There is sheer liquidity crunch in the market where causing the gilts to fall sharply than corporate bonds Yield .The spread has been from around 0.85% to 1.05% 10 year bonds for both, for past 5 months.

Corporate bonds

The corporate bonds will perform better only if the spread between the two declines.when the economy starts recovering the profitability of the corporate increases .The credit risk of the issue decreases with the turnaround so it increases the confidence of the investors and the tend to subscribe more for these bonds. As starting of the earning season everyone was cautious about the earnings FY12 Q3 but the corporate India has delivered better than expected. But then that was the period where the issue nearby to nil by the corporate and that was the time where the GOI captured the interest of the investors.

Investors

They should not allocate their entire funds into Gilts or the Corporate bonds it is better or safe around of the total fund kept aside for debt allocation around 70% of it should be kept for the Gilts and balance for Corporate bonds. Where the high yields on the corporate bonds make few investors specially the retail ones to subscribe but before investing they should do complete analysis of the co which has come out with the issue. The cash balance ,past issue ,Debtors time period ,loan book ,creditors period ,the promoter background,current market scenario,Macro economics ,Micro economics.

Current Bond Market

The money market is in the liquidity crunch  , where RBI has withdrawn 1 trillion at the end of the fortnight reporting cycle .The term money rate is around 10.5%-10.25% for 3-12 months tenure .The demand for money is going to be high by the GOI as it’s the financial year end where the subsidies burden is high ,disinvestment plans off ,tax outflows etc .The  RBI can cut CRR by another 0.25-0.50 basis pt that will infuse liquidity and help for the OMO’s .The new fortnight starting 25^{th February} will push call money rates to new highs of 2012 9.0%-9.5%  with high drawn from the LAF market around 1.5 trillion .The Money rates is also expected to remain up  around 10.5% to 11% 3-12 months tenure .where the short term liquidity crunch 1-3  m can push the rates above  10.5%.