"There have been few issuances by top-rated corporates and mutual funds have been aggressive bidders for these assets. As a result, the spread of corporate paper over government securities is between 65-140 basis points across the yield curve," said the report.

According to I-Sec, the risk-capital cost for investment in corporate paper is about 80 basis points higher than government securities for a bank as 100 per cent risk weightage is assigned to corporate as against the peg of 2.5 per cent for gilts.

"The current spreads barely covers the cost of risk capital at the short end. The implied cost for credit and liquidity risk works out to35-50 basis points for three-year paper and 55-75 basis points for five year paper. For banks with low cost of deposits, it will be profitable to invest in gilts whereas banks with high cost of deposits corporate papers will be more profitable," it said.

"Recent small issuances by corporates in the market have been subscribed by the mutual funds which is why the spread has narrowed," it said. According to the report, with the narrowing of spreads most corporates are coming out with debt papers. Corporates are also likely to test the market with larger issuances shortly.

"Despite tight liquidity, market sentiment is bullish, and medium-, long-term bond prices are ruling stable," it said.

According to the report, central bank's open market operation (OMO) sales have crossed Rs 4,200 crore. "Tight liquidity last week forced primary dealers to draw refinance of Rs 10,000 crore from the central bank at 8 per cent," it said. Tightness in the short-term money market has resulted in decline in the market volumeof commercial papers (CP). "With most of surplus liquidity chasing medium- and long-term gilts, short term corporate yields are not expected to decline over the next fortnight," the I-Sec report said.