Spreads on long-tenor State Development Loans (SDL) have come down by about 18 basis points compared to last week, even as states have been able to borrow 10-year money at about 6.41-6.42% during Tuesday’s auction.
Last week, the 10-year benchmark yield was trading close to 5.79% while on Tuesday, the benchmark yield closed at 5.83%. In the same period, 10-year SDL yields have fallen by about 14 basis points.
Rajasthan borrowed 30-year and 35-year funds at 6.55%, which is where the 10-year SDLs were auctioned last week. Similarly, yields on 10-year SDLs have fallen by about 10 basis points compared to last week, even as Goa, Manipur and Tamil Nadu managed to raise funds at 6.41-6.42% on Tuesday. Short-tenor papers also saw their yields coming down by about nine-10 basis points compared to last week.
“There is a lot of investor demand for long-tenor papers in recent times by pension funds and insurers. That is why you could see some compression in spreads,” said a fixed-income expert at an insurance firm. It is noteworthy that the compression in spreads is being seen despite an increase in borrowings by states. On Tuesday, 10 states borrowed Rs 13,750 crore in the auction against a notified amount of Rs 11,250 crore.
According to a Care Ratings report, there has been a decline in the cost of market borrowings for the state governments since the last auction held on July 7. “The weighted average yield of the SDLs auctioned on Tuesday at 5.67% was 59 bps lower than that of last week. With this drop, the cost of borrowing for the state governments is lower than that of the central government. The weighted average yield of the central government securities at the latest auction held on July 10 was 5.82%, which is 15 bps higher than the yield of the SDLs auctioned on Tuesday. The weighted average yields of SDLs have fallen by 207 bps since the first auction of the current fiscal year,” the report stated.
