Spread between 10-year state loans & government securities widens as benchmark yields ease

November 11, 2021 1:45 AM

The excise duty cut by the central government on the eve of Diwali, which was followed by reduction in the VAT levied on fuel products by most states provided relief to the market as it eased inflationary pressures.

The moderation in yields on benchmark bonds occurred after the yields on longer-tenure US Treasury notes slipped to the lowest levels in months. The US Treasury yields closed at 1.43% on Tuesday.The moderation in yields on benchmark bonds occurred after the yields on longer-tenure US Treasury notes slipped to the lowest levels in months. The US Treasury yields closed at 1.43% on Tuesday.

By Manish M Suvarna

The spread between 10-year state loans (SDL) and government securities widened by 5-10 basis points this week after the yields on benchmark securities eased. Yields on benchmark bonds have eased after the central and state governments cut taxes on fuel and US Treasury yields softened.

The spread on 10-year loans of Rajasthan and Uttar Pradesh has increased to 64 basis points each, West Bengal and Goa 71 basis points each, and those on Tamil Nadu and Manipur rose to 67 bps and 74 bps, respectively.

“Spread has widened this week mainly because the government bond yields have rallied, but corresponding state government bond yield remained firm. Earlier, we have seen the spread between them was narrowing, at that time G-Sec yields were rising and yields on state loans were easing due to strong demand and lower borrowing,” said Mahendra Kumar Jajoo, chief investment officer – fixed income at Mirae Asset Investment Managers (India).

Meanwhile, borrowing so far by states in the current financial year has been 12% lower compared to the indicative auction calendar for this period. The market borrowings by many states in this fiscal has been lower than a year ago. So far, 27 states and two Union Territories have raised a total of Rs 3.88 lakh crore during April 8 and November 9. “States will stick to indicative market borrowing or may be marginally lower, but we cannot expect additional borrowing,” Jajoo said.

The excise duty cut by the central government on the eve of Diwali, which was followed by reduction in the VAT levied on fuel products by most states provided relief to the market as it eased inflationary pressures.

Easing inflationary pressures have boosted sentiments, which further widened the gap between 10-year G-Sec and state loans of similar maturities. The benchmark yield which was at 6.38% last week has now fallen to 6.30%. This also resulted in a marginal reduction in yield on state loans, but the spread remains high.

The moderation in yields on benchmark bonds occurred after the yields on longer-tenure US Treasury notes slipped to the lowest levels in months. The US Treasury yields closed at 1.43% on Tuesday.

Market participants expect yields on state loans to remain range bound in coming days due to lower borrowing and firm demand from investors. “We expect rates on SDL to remain in the range of 6.94% and 6.96% in coming days,” a fund manager with a mid-sized fund house said.

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