Yields on a 10-year AAA corporate bond are now below 7.20%, while the 10-year government security (G-sec) yields 6.82% on a semi-annual basis, or 6.94% annualised.
This has led to a narrow spread of just 15-20 basis points (bps), down from a typical spread of around 45-50 bps, with investors prioritising safety and issuer profile amid volatility globally in financial asset valuations.
One basis point is a hundredth of a percentage point.“Spreads between government and corporate bonds have consistently narrowed in recent months, especially in the AA-rated and above categories, where most regulated investors are permitted to invest,” said Venkatakrishnan Srinivasan, Managing Partner, Rockfort Fincap LLP. “Demand from insurance companies, provident and pension funds, mutual funds, banks, foreign portfolio investors, and corporate treasuries is driving this trend as these investors look to lock in longterm AAA instruments.”Recent issuances by PowerGrid Corporation and Indian Bank, both AAA-rated public sector entities, have drawn strong demand, compressing spreads to below 20 bps. With the Reserve Bank of India (RBI) shifting to a ‘neutral’ stance from ‘withdrawal of accommodation’, investor sentiment has been further buoyed by expectations of possible rate cuts.
PowerGrid raised Rs 5,000 crore at 7.08%, while Indi an Bank raised Rs 5,000 crore at 7.12%.
BALANCING RISK & REWARD
Mutual funds are also intensifying competition for AAA-rated corporate issuances, prioritising returns while managing credit risk. Fund managers are increasingly accepting lower yields in exchange for the stability of high-rated corporate bonds.
A limited supply of AAArated issuances has intensified investor interest, according to bond market analysts. The slower pace of AAA issuances has also put pressure on spreads over G-secs. Investors such as insurance companies, which must mandatorily buy AA and above-rated papers, have bought infrastructure or corporate bonds to meet prescribed investment guidelines.
“The scarcity of these long-duration papers has driven demand, with investors buying even at yields below state development loans,” said Ajay Manglunia, a debt capital market expert.
“Expectations are that yields in G-secs will move further south as demand from FPIs is likely to accelerate based on allocation for indices. So, issues in the AAA segment have slowed down specifically for longer durations. Demand from insurance and retiral funds has narrowed the spreads. It is as of now 10-20 bps over G-secs.”