Bond spreads get narrower

Bond spreads get narrower
Comment E-mail Print Share
First Published: Fri, Apr 03 2009. 12 35 AM IST

Rising yields on government bonds have been a concern, the worry being whether the government’s outsized borrowing programme will crowd out private borrowing. And indeed the yield on corporate bonds, too, has gone up in tandem.
There is, though, a saving grace, with the spread between the 10-year sovereign bond yield and the similar-maturity, highest rated corporate papers narrowing.
Corporate bond yields haven’t gone up as much as yields on government securities. Is risk appetite in the corporate bond market on the rise?
Also See Risk Appetite Rises (Graphic)
The spread, which was as much as 336 basis points in early January, shrank to 177 basis points at March-end.
The generic yield on the AAA-rated 10-year paper closed at 8.78% on 31 March when the yield on the 10-year government paper closed at 7.01%.
The spread is expected to shrink further in the absence of new corporate bond issuances in April.
Generally there is a lull in bond issuances in April and May because companies are usually busy formulating their financial plans for the year during this period.
Bankers also point out that returns in the government bond market have been terrible during the last quarter as bond prices fell and yields soared.
Given the high spread between the government and corporate papers and in the absence of substantial new issuance, investors started trading the existing paper issued by companies, forcing spreads to narrow.
Given the huge supply of government bonds in the pipeline, it’s likely that dealers will find better opportunities in corporate bonds, which could result in spreads coming down further.
Bond dealers also expect mutual funds to start deploying money meant for income funds in corporate bonds in the near future.
Foreign institutional investors are also expected to enter this market in a major way as their total limit for investing in debt has been revised to $15 billion (Rs75,450 crore) $6 billion earlier.
All these factors should help cushion, to some extent, the impact of the government’s gargantuan borrowing programme on the cost of funds forcompanies.
Graphics by Ahmed Raza Khan / Mint
Comment E-mail Print Share
First Published: Fri, Apr 03 2009. 12 35 AM IST