Spread between 10-year G-Secs and SDLs narrowed in last two weeks

State Development Loan

The spreads between government securities (G-Secs) and state development loans (SDLs) maturing in 10 years narrowed in the last two weeks on the back of easing yields on G-Secs and lower-than-planned issuances by state governments, experts said.

The spread between the two bonds stood at 45 basis points (bps) as of December 19, down from 49 bps on December 5, as per data compiled by Moneycontrol.

One basis point is one-hundredth of a percentage point.

“As issuance from SDL is lower than planned and demand from long-term investors is intact, it results in a spread compression,” said Ajay Manglunia, Managing Director at JM Financial.

Further, Mataprasad Pandey, Vice President, Arete Capital Service, a Mumbai-based investment advisory firm, said this quarter SDL supply had increased, which led to the spreads widening, but later in December, supply started coming down, which further narrowed the spreads between G-Secs and SDLs.

Usually, whenever the spreads between G-Secs and SDLs narrow, it indicates that the states are borrowing lesser amounts than what is projected in the calendar, experts said. This is also important, as it shows the trend in the borrowing of states from the market.

During this period, the yields on G-Secs, especially the 10-year benchmark 7.18 percent 2033 bond, fell around 10 bps.

This was on the back of a fall in US Treasury yields after US Federal Reserve officials guided for a 75-bps cut in the world's largest economy by the end of 2024.

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Lower supply

In the last three weeks, states have seen lower borrowings compared to those indicated in the calendar.

According to the RBI data, on December 19, states borrowed 80 percent of the amount indicated on the auction calendar, 97 percent on December 12, and 75 percent on December 5.

In absolute terms, on December 19, states borrowed Rs 15,132 crore, compared to Rs 18,871 indicated in the auction calendar, and Rs 12,100 crore on December 12, compared to the Rs 12,400 crore indicative amount.

Similarly, on December 5, states borrowed Rs 19,692 crore as against the indicative amount of Rs 26,350 crore in the auction calendar.

Experts said that a lower requirement of funds due to tax collection might see states borrowing less from the market.

In the coming week, on December 26, states are likely to auction bonds worth Rs 28,600 crore as per the auction calendar.

Yield movement

The weighted average cut-off of state government securities eased to 7.61 percent on December 19, from 7.69 percent on December 12.

This was thanks to the easing yield on G-Secs, experts said.

Manglunia further added that the market witnessed a decent rally in G-Secs in the last few days after the Federal Open Market Committee (FOMC) meeting, easing uncertainty on rate hikes. This has also made investors feel more comfortable with SDL as compared to corporate bonds.

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Outlook

Money market experts are of the view that the spreads are likely to remain in the range of 40-50 bps in the coming month, and most movement will depend on the borrowings by the states.

“I do not see a significant increase in the spreads, which should mostly range between 45 bps and 50 bps,” Pandey said.