Spreads between government securities, corporate bond narrow on weak demand

Similarly, the five-year papers are traded between 5.90% and 5.95% in the secondary market of corporate bond and five-year G-Sec is traded at 5.73%.

By Manish M Suvarna

Even as yields on government securities have risen in the past few days, weak demand from debt funds and low supply of corporate bonds have kept yields on these papers mostly range bound. This has resulted in narrowing in spread between government securities and corporate bond.

Currently, the spread between government securities and AAA-rated corporate bonds maturing in 10-year is hovering at 65 basis points, which is lower than the usual spread of 75-85 bps. In the five-year segment, the spread has narrowed to 25 basis points.

“It is basically a demand-supply scenario. The supply towards government securities is constant, whereas in corporate bond, demand is weak from mutual funds and supply is not resuming as people are waiting for the central bank’s credit policy,” said Ajay Manglunia, MD and head of institutional fixed income at JM Financial.

According to market participants, yields on AAA-rated corporate bonds maturing in 10-year are hovering between 6.85% and 6.90%, while the 10-year benchmark G-Sec is trading almost at 6.20%. Similarly, the five-year papers are traded between 5.90% and 5.95% in the secondary market of corporate bond and five-year G-Sec is traded at 5.73%.

In past few days, yields on government securities have constantly been rising due to heavy supply of papers and rising crude oil prices in the international market. The supply of corporate bond has been muted as most companies remained on the sidelines ahead of the RRI’s monetary policy and weak demand from mutual funds due to muted inflows into long-end funds. This has capped the yields on corporate bonds and resulted in narrowing of spread between both.

Yields on government securities, especially on most traded papers 5.63%-2026 and 6.64%-2035, have seen sharp rise in past couple of days on weak sentiments of traders. This is because of supply concerns as both these bonds were present in the auction held on Friday, and heavy devolvement on primary dealers at auctions on July 23 and on Friday.

The RBI has set 6.10% coupon on the new benchmark bond, but after that yields started rising due to low liquidity in that segment and rising crude oil prices. First auction of benchmark bond went through devolvement as market was asking higher yields than what the RBI was offering. The auction on Friday also saw devolvement in the most-traded paper, 5.63%-2026.

After heavy devolvement, yields on new benchmark 10-year 6.10%-2031 bonds rose almost 10 basis points. It was allotted at 6.10% by the central bank on July 9. The RBI on July 23 and July 30 devolved 10-year 6.10%-2031 and 5.63%-2026 bonds worth Rs 11,144.145 crore and Rs 7,465.147 crore, respectively.

“The first auction on benchmark bond went smoothly, but second auction saw a large devolvement. Because of weak demand and that supply is constant, yields on government securities are rising,” a fund manager with a mid-sized fund house said. This month, the central bank has supplied Rs 22,000 crore of 5.63%-2026, Rs 22,000 crore of 6.64%-2035 and Rs 28,000 crore of the benchmark 6.10%-2031.

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