With G-Sec yields having slided significantly in past few weeks, the gap between the yields of corporate bond and government securities have widened sharply. The spread between the 10-year corporate bond and government paper has risen to around 390 basis points compared to 340 bps, two weeks ago, said dealers.
Spreads between both the instruments have risen significantly as the yield on the 10-year benchmark g-sec paper has seen a drastic fall by about 30 bps in the last 3 days, in anticipation of a rate cut by the central bank due to a slowdown in inflation and crude prices.
On Wednesday, the yield on the 8.24% note due April 2018 dropped 23 bps to 6.78% at the close as compared to 7% on Tuesday. ?There may be a cut in the repo and reverse repo along with the cash reserve ratio soon to spur growth,? said a private bank dealer.
Volumes in G-sec bonds have too seen a substantial rise in the past one month as the central bank has slashed the short-term lending rate by 150 bps since early October to 7.5% to neutralise the economy from the global credit crisis.
According to data from Clearing Corporation of India (CCIL), the volumes in the government securities market have risen sharply from Rs 7,933 crore in October to Rs 10,674 crore in November.
However, volumes in corporate bond market have remained at only around Rs 5,480 crore in November as against Rs 7,658 crore in October.
?There is hardly any participation seen in the corporate bond market. MFs who are the major players in this market are not seen actively participating in the market,? said Golak C Nath, vice president & economic advisor with CCIL.
?Market participants are waiting for a signal from the RBI, expecting a rate cut by the weekend. As a result, most public sector banks, who are in the pipeline, will issue bonds only after they get a cue from the central bank. Market is also awaiting the news on the government borrowings programme,? said S Srinivasa Raghavan, head of trading at IDBI Gilts.
Dealers say after the rate cut, issuances worth R 25,000 may come up, following the rate cut. ?If there is a rate cut, we would see the g-sec paper touching 6.60%. The AAA benchmark corporate paper would ease to 10.50%,? said the private bank dealer. An industry source said that companies which have not been able to raise money through the right issue are now relying on public deposits.
Meanwhile, markets are eagerly awaiting a cue from the RBI after which they plan to issue bonds. According to Fixed Income Money Market Derivative Association?s reporting platform, around Rs 499 crore worth bonds were traded, as against Rs 260 crore on Tuesday.
Paper tiger
• Spread between 10-year corporate bond and government paper has risen to around 390 basis points compared to 340 bps two weeks ago
• Spreads between the instruments have risen significantly as the yield on the 10-year benchmark paper has seen a fall by 30 bps in the last 3 days
• On Wednesday, yield on the 8.24% note due April 2018 dropped 23 bps to 6.78% at the close as compared to 7% on Tuesday