The yield on corporate bonds have stayed elevated despite government bond yields cooled-off. This is majorly due to supply issues and reflecting weak state government securities auction, said market participants. This has widened the spread between the government bonds and AAA corporate bonds to around 70 basis points (bps) currently from around 50 bps in June-end.
The yield on 10-year government bonds is currently trading at 6.51%, sharply down from its high of 6.64%. While yields on the same tenure corporate bond is trading at 7.25%. The worry over supply-demand mismatch and anticipation of higher borrowing due to GST reforms, along with rule out of further rate cut, had led to surge in yield in the domestic bond market. However, yield softened as concerns over extra borrowing on account of GST slab tweaks have eased.
“There has been some widening of yield spreads, where we have seen corporate bonds stagnating at a particular level. This is largely due to lack of additional demand and higher spreads in SDL auctions,” said a corporate bond dealer at a private sector bank.
Though yield on state bonds fell from its peak, it is considerably high, said market participants. In the last SDL auction on Tuesday, the cut-off yield on the 10-year SDL (state development loans) for Goa was 7.39%. For comparison, the cut-off yield for Assam was 7.63% in the auction held on September 2.
Venkatakrishnan Srinivasan lists possible reasons
“Supply mismatch is a reason why yields on corporate bonds are not declining. More issuances have come in the short end than the longer end of the curve. Moreover, the amount raised via state development auctions has increased compared to the previous year. Even though it is comparatively less than the indicative calendar, it is still higher than last year and that too more in long term bonds, which is exacerbating the worry,” said Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap LLP.
“If g-secs (yield on 10-year benchmark bond) conclusively break this 6.45-6.50 band, which they have been stuck now for a while, then there might be a further trigger for corporate bonds,” said the dealer. Market participants will also watch out for the borrowing calendar for the second half of FY26 for further cues.
Srinivasan on market expectations
Srinivasan believes that the market expects more PSU issuances before the policy, and stronger investor appetite could drive aggressive cut-offs in the upcoming deals. “While yields for regular issuers may ease gradually, first-time or less frequent PSU issuers are likely to witness sharper corrections, as some plan to tap the market after a long gap,” said Srinivasan. For instance, Numaligarh Refineries will tap the market on September 22 by raising Rs 5000 crores through a 10-year bond, he added.
The corporate bond market has already started showing signs of revival in September after a dull activity in the previous two months. Issuers such as Aditya Birla Capital and Bajaj Finance tapped the corporate debt market last week, raising Rs 3,400 crore and Rs 1,000 crore, respectively.