Spread between G-Secs and corporate bonds widens on resumption in issuance by companies

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The spreads between corporate bonds and government securities (G-Secs) of similar maturities widened in November after corporates aggressively resumed their bond issuances and on easing yields on G-Secs, dealers said.

The spreads between AAA-rated corporate bonds and G-Secs have widened by 10-15 basis points (bps) and AA-rated and below, have widened more than 35-40 bps so far this month.

Since the start of the rate hike by the Reserve Bank of India (RBI) in May, the spreads between both these securities remained mostly in the range of 27-32 bps. But in October, the spreads shrank to 23-25 bps as G-Sec yields inched up.

"The spreads between AAA-rated corporate bonds and G-Secs were very thin, thanks to a lack of issuances so far. In November, with the resumption of corporate bond issuances, there’s been a bit of normalisation of spreads," said Ajay Manglunia, Managing Director and Head of Investment Group at JM Financial.

Dealers said that spreads are expected to widen further but that will depend on the demand-supply matrix, unexpected repo hikes in the forthcoming monetary policy committee (MPC) meeting and adverse geopolitical factors, if any.

“It is likely that issuances will increase in the future, which could lead to further widening of spreads, going forward,” said Sandeep Bagla, CEO, Trust Mutual Fund.

Here, the spread refers to the difference in yields between corporate bonds and G-Secs of similar maturities.

Issuances of corporate bonds

This week, more than Rs 30,000 crore worth of bond issuances have been done.

Money market dealers said that with the expectation of a few more rate hikes this fiscal, issuers have decided to shift some of their borrowings to non-convertible debentures (NCDs) to lock-in the fixed coupon rates.

"We could witness a large number of issuances tapping the bond market this month, mainly from the BFSI segment, as credit growth is picking up. On the other hand, due to expectations of moderation in inflation and future rate hikes, government bond yields have come down by 10-20 bps," said Venkatakrishnan Srinivasan, Founder and Managing Partner at debt advisory firm Rockfort Fincap.

According to Prime Database, corporate bonds worth Rs 3.34 lakh crore have been issued till October this financial year, including Rs 55,603 crore in August, Rs 82,598 crore in September and Rs 43,584 crore in October.

Also read: Corporate bond issuances growth may slow as higher rates hurt: Dealers

Corporate bond yields

The yields on corporate bonds are likely to rise further in the coming weeks as investors have started demanding higher returns on these instruments, dealers said.

This is because in the last few months yields on corporate bonds remained mostly range-bound, but now on expectations of higher supply from issuers and rate hike by the RBI, investors have begun to demand more returns.

Recently, the yield on Bharti Telecom Ltd's bond issue was set at 8.80 percent for AA+ papers, 8.12 percent on Aditya Birla Finance Ltd's 10-year papers, 7.96 percent on HDB Financial Services Ltd's papers and 7.70 percent on Housing Development Finance Corp's five-year bonds.

Dealers are of the view that before any further increase in rates, most companies are tapping the corporate bond market to raise funds to lock-in lower rates.

"With the expectation of a few more rate hikes this fiscal, issuers have decided to shift some of their borrowings to non-convertible debentures to lock-in fixed coupon rates," said Srinivasan.

Also Read: Benchmark bond yield to trade between 7.20% and 7.40% in near term: Dealers

Easing yields on G-Secs

The yield on the 10-year benchmark bond has eased more than 20 bps since November 3 due to expectations of easing inflation and lower rate hikes by the RBI.

Easing crude oil prices and profit booking by traders have also helped bond yields to ease.

Retail inflation, measured by the Consumer Price Index (CPI), dropped to a three-month low of 6.77 percent in October, although it is still above the RBI’s comfort zone.