Power Finance Corp.’s (PFC) recent decision to scrap two bond issuances worth a substantial INR 60 billion has sent ripples through the Indian debt market. The move, attributed to lower-than-expected demand at the company’s desired pricing, begs the question: is this an isolated incident, or a reflection of broader market sentiment amidst rising bond yields? Furthermore, were the yields on offer truly unattractive to institutional investors?
The backdrop to PFC’s failed attempt is a notable trend of rising bond yields in recent times. While yields had previously fallen due to expectations of rate cuts and ample liquidity , April 2025 saw a shift. India’s 10-year government bond yield, a benchmark for corporate borrowing, had edged higher. This increase can be attributed to profit-booking by traders and anticipation of a new 10-year bond issuance by the Reserve Bank of India (RBI).
In this context, PFC’s experience appears to mirror a cautious market sentiment where investors are becoming more discerning about the yields they demand. For its June 2035 zero-coupon bond, PFC had anticipated a yield of around 6.30%, but the market’s cut-off landed in the 6.50-6.55% range. Similarly, for the April 2040 bond, the cut-off of approximately 7.07% exceeded PFC’s expectation of 6.95-7.00%. This reluctance from investors to subscribe at PFC’s initial pricing suggests a potential mismatch in expectations, possibly fuelled by the rising yield environment. A senior merchant banker noted a lack of investor interest in the longer end of the yield curve.
Adding another layer to the analysis is the recent successful zero-coupon bond issuance by Rural Electrification Corporation (REC) in Sep 2024 at a yield of 6.25%. This issuance was oversubscribed seven times, indicating strong investor appetite at that level. Is it that investors having previously traded REC’s zero-coupon bonds at higher levels, demanding similar returns from PFC ? This suggests that the market had recalibrated its expectations for PSU zero-coupon bonds, and PFC’s initial offers were perceived as less lucrative in comparison to the recent REC issuance.
While the yields demanded by the market for PFC’s bonds (6.50-6.55% and around 7.07%) might appear attractive on the surface, especially when compared to prevailing deposit rates , the context of rising yields and the benchmark set by REC likely played a crucial role. Institutional investors, with their sophisticated understanding of market dynamics and risk-return profiles, might have deemed these yields insufficient given the prevailing trends and the availability of potentially more attractive opportunities or the expectation of further yield increases. Foreign Portfolio Investors (FPIs) turning net sellers in the Indian debt market in April 2025, citing narrowing yield spreads with US bonds, further underscores a potentially shifting appetite for Indian debt at previous levels.
In conclusion, PFC’s scrapped bond issuances do seem to reflect a cautious market sentiment in the face of rising bond yields. While the yields on offer might still appear reasonable in isolation, the comparison with recent successful issuances and the broader trend of increasing yields likely led institutional investors to demand higher returns, ultimately resulting in the lower-than-expected demand for PFC’s bonds. This episode serves as a reminder of the dynamic nature of the bond market and the importance of aligning pricing expectations with prevailing market conditions and investor preferences.
Sources and related content :
Indian bond yields rise on anticipation of new 10-year issuance, position unwinding
PFC Scraps Two Bond Issuances Worth Rs 6,000 Crore – NDTV Profit
REC’s deep-discount zero-coupon bond issuance receives strong demand | Finance News
Indian bond yields edge higher as traders book profits – Mint
livemint.com/market/stock-market-news/indian-bond-yields-edge-higher-as-traders-book-profits-11745989834437.html
PFC Scraps Two Bond Issuances Worth Rs 6,000 Crore – NDTV Profit
ndtvprofit.com/business/pfc-scraps-two-bond-issuances-worth-rs-6000-crore
