Corporate Bonds Under Accommodative Monetary Policy

In his latest policy statement, the RBI Governor outlined how the 100 basis points (bps) cut in the policy repo rate during the current easing cycle has been transmitted across different segments of the financial system. Money Market: Following the cumulative 100 bps cut, the weighted average call rate (WACR) eased by 108 bps. Since the February policy, the 3-month Treasury Bill yield has fallen by 110 bps, the 3-month commercial paper (CP) rate for NBFCs by 161 bps, and the 3-month certificate of deposit (CD) rate by 170 bps. This shows a rapid pass-through in short-term funding costs. Bond Market: Government securities have reacted, though with varying intensity. The 5-year G-Sec yield has dropped by 63 bps, while the 10-year benchmark (6.79 GS) yield is down by 28 bps since February. Corporate debt markets mirrored this trend, with 5-year AAA-rated corporate bond yields falling by 56 bps, signalling improved financing conditions for high-quality issuers. Credit Market: In lending, the weighted average lending rate (WALR) of scheduled commercial banks declined by 71 bps for fresh rupee loans between February and June 2025, with 55 bps of this directly due to policy rate cuts. For outstanding rupee loans, the WALR moderated by 39 bps in the same period. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits eased by 87 bps, reflecting lower funding costs for banks. Other Channels: While the Governor did not specifically mention them, transmission is also operating through the exchange rate and asset price channels, as seen in movements in the forex market and equity valuations. Together, these developments suggest that the RBI’s earlier rate cuts are steadily permeating the economy, though the complete effects,especially in retail credit, are still unfolding.

When the world is flooded with cheap money, many believe that asset classes such as equities, Gold, and real estate are expensive, but very few realize that debt is also very expensive and thus highly risky. Let me explain with a simple example. In a normal situation (no excesses on either side), a 10-year bond is available in the market with 6% coupon rate and a face value of 100. But when there is excess money in the system, chasing this bond, the price of the bond goes above 100 to 110. When someone purchases at 110, the net yield drops to 4.72%. Yield is inversely proportional to price. Excess money printing reduces the available yield on debt investments. Now, when that happens, investors want to look out for bonds with higher yields. In their desire to invest at higher yields, investors end up picking substandard debt papers. They forget that higher yields also come with higher risks. Risk that could not just impact interest payments but put the entire principal at risk. Many people are familiar with the risk of default in debt investments, but a very few understand credit spread risk. Credit spread is the difference between the yield of a corporate bond and a government bond. A bond of similar tenure and coupon payment schedule. The credit spread depends on the rating of the corporate bond. The lower the rating, the higher the credit spread over the Govt. bond of similar tenure and payment schedule. The credit spread is not static, and it changes with the investment scenario. When the investment community is very confident of the global outlook, the credit spread shrinks. Whereas, when there is fear regarding the future prospects, the credit spread expands. For example, in normal times, a 10-year AAA-rated bond will have a credit spread of 1.75% which could shrink to 0.90% when sentiments are highly optimistic and can expand to 2.70% when the sentiments are depressing. For BBB-rated bonds, the range could be wider depending on the market sentiment. So when the credit spread increases from 0.90% to 2.70%, the price of the bond goes down significantly, leading to severe mark-to-market losses. The extremes in the system can easily be understood when the market for unrated private credit has been expanding massively because investors want to chase higher yields while ignoring risks. These level of speculation most of the time leads to high losses and disappointment. If you are holding low-rated/no-rated Debt investments, it's high time you reevaluate your holdings and exit if you are not confident about the underlying business. Low/No-rated long-duration corporate debt papers should be avoided in an uncertain macro-environment. Always remember, when you invest in debt instruments, return of investment is more important than return on investment. And to ensure return of investment, one needs to understand the potential risks of such investments. Truemind Capital #debtinvestments #risks #truemindcapital

Bonds used to feel boring, until I saw how much demand they’re getting even when the RBI held rates steady in the last MPC meeting. One thing many people missed this year: Even though the RBI held interest rates steady post the initial cuts early 2025, demand for high-yield corporate bonds surged across both institutions and HNIs. And the reason is very simple: When RBI cuts rate or stay unchanged, investors start hunting for • better fixed returns, • predictable income, and • alternatives to volatile equity phases. Corporate bonds, especially the 10 to 13 percent bracket, ended up becoming the quiet favourites. For many of my followers who aim for predictability without volatility and looking for defined returns, this is an important shift. Because here’s the math: A conservative investor earning a 10% annual return needs roughly ₹24 lakh to generate a steady monthly income of ₹20,000. This level of income can be achieved through high-quality corporate bonds, without taking on the substantial risks associated with equity markets. And what makes this accessible is how platforms like Jiraaf - Powered by AI Growth simplify it. No heavy research, no complicated platforms, just transparent yields, issuer details, and smaller ticket sizes for everyday investors. Sometimes the biggest market shift is the one that happens without a headline.

Bond market update outlining Economic growth and Banking liquidity outlook RBI has been proactively managing banking liquidity since January 2025 and has infused more than INR 6 trillion of liquidity into system through various tools. We expect core / durable liquidity to remain largely in surplus for Apr-Sept 2025 and expect additional 25-50 bps of rate cuts in next 6 months Market view We have remained positive on duration and long Government bonds throughout 2024 as demand supply dynamics for government bonds were favorable. The inclusion of government bonds in JP Morgan indices brought USD 20 billion of FPI flows into government bonds. Fiscal consolidation over the past two years has reduced the fiscal deficit from 5.4% to 4.4% of GDP. OMO purchases of over INR 2.5 trillion (Including secondary purchases) in Q1 CY 2025 by the RBI have addressed the deficit core liquidity problem In line with our macro view of shallow rate cut cycle and positive liquidity conditions we expect Short corporate bonds (3-5 year) to perform equal or better than long bonds in next 12-18 months. Rationale is as follows: • Banking liquidity to remain in surplus • Expected lower supply of corporate bonds/ CD due to slowdown and delay in implementation of LCR guidelines • Attractive spreads and valuations as highlighted in the note Incrementally Short bonds can outperform long bonds from risk reward perspective as: • The Rate cut cycle can be shallow due to recovery in Growth and external sector uncertainties like Tariffs, currency etc. • OMO purchases might be lower in H2, expect another INR 1-1.5 trillion of OMO purchases in next FY • As Govt has shifted from Fiscal deficit targets to Center's Debt to GDP targets incremental Fiscal consolidation from here on in future looks limited Complete detailed rationale is attached in note #liquidity #growth #rbi #monetarypolicy #fixedincome #mutualfunds #corporatebonds

The Fed Hasn’t Eased, But Markets Have: Financial conditions are the strongest they’ve been in years (see chart below). Capital flows and credit markets are highly supportive by economic growth, signaling minimal risk of recession. Corporate obligors are able to refinance their debt with coupons that are ~50bps lower y-t-d (BSL market has enjoyed record refinancing during the summer of ’25), the equivalent of the Fed easing 2x (despite the Fed not actually easing as of yet). Recent PMIs indicate a vibrant economy as companies are reporting record earnings that are pushing equities to ATHs. There are no signs of slowdown, just TINA - so stay invested. With the Fed soon to begin a new easing cycle, even more liquidity will only serve to bolster investor confidence. Credit investors will benefit from the resurgence in new issuance, as deal activity is creating a rich opportunity set for credit investors. Refinancing not only extend the maturity runway, but also enable companies to lock in a lower costs of capital. Private Equity sponsors have focused on asset management over the past three years as monetization slowed, however, that too is changing as there is a resurgence in M&A activity, which creates significant investment opportunities for private credit lenders. This surge in activity is offering attractive entry points across the capital structure, particularly in higher-quality credits where direct lending spreads remain compelling relative to fundamentals. For capital allocators, it is safe to lean in, capture yield, secured by strong covenants, while participating in transactions that are benefiting from both healthy balance sheets and a favorable macro backdrop.