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| Edited By: Neelasri Barman |Source: DNA |Updated: Mar 30, 2018, 02:53 AM IST
The spread between the 10-year corporate bond and gilt, which widened sharply after the auction of the new 10-year gilt 7.80% 2020, last Friday may remain at par till the Reserve Bank of India (RBI) resorts to further policy tightening, said experts.
Bond spreads refer to the difference between the yields of two bonds. “The auction of the new 10-year gilt resulted in widening of the spread. The yield on gilt fell sharply but the fall in corporate bond yields did not match that,” said Arvind Konar, head of fixed income at Almondz Global Securities.
In the annual policy announced on April 20, the RBI hiked cash reserve ratio (CRR) and key short-term lending and borrowing rates (repo and reverse repo rate) by 25 basis points. The hike was lesser than the market expectation of 50 basis points.
This had helped corporate bond yields to fall a tad. But the drop in the yield of 10-year gilt was larger.
The previous 10-year benchmark gilt 6.35% 2020, ended at a yield as high as 8.10% last Thursday. On Friday, the new 10-year gilt was auctioned by the RBI and the yield closed at 7.76%. This made the spread wider.
The spread on 10-year papers is expected to hover at these levels.
“Till the RBI hikes interest rates further, spreads will be at these levels with 5-10 basis points movement here and there,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.
Gilt yields are expected to rise in tandem with corporate bond yields. “CRR and policy rates may be hiked by another 25 basis points, thus pushing up corporate bond yields by up to 25 bps,” said Dharmesh Ojha, head of fixed income, Standard Chartered-STCI Capital Markets.
“Even if gilt yields fall in the next few days due to general risk aversion following the debt crisis in Europe, after that it will start rising due to concerns on further policy tightening,” said S Srinivasaraghavan, vice-president and head of treasury, IDBI Gilts.
In a scenario of rising interest rates, corporates may speed up their debt issuances. As per data available with Delhi-based Prime Database, corporates have raised Rs 7,430 crore through debt private placements in April. Issuances close to Rs 15,000 crore are expected to hit the market in the next couple of months.
The fresh supply of gilts will also be larger. This is because RBI has resorted to frontloading, wherein for the first six months of the fiscal, there are auction in the range of Rs 11,000-15,000 crore every week.
