Spread between corporate, G-Sec, bonds narrow as liquidity improves

The spreads between the highest-rated corporate bonds and government bonds have started narrowing as liquidity in the system improves. But, it will take some time to return to normal, said bond dealers.

Currently, the spreads between the 10-year G-sec and AAA papers is about 100 basis points; a year back it was 50-60 basis points, its normal level. The one-year bond spread between the two is about 140 basis point, from about 70-80 basis points, its normal level.

New Reserve Bank of India (RBI) Governor Shaktikanta Das is meeting industry representatives, as well as representatives of banks, non-bank financial companies, small and medium enterprises, as well as market participants. Das will also meet foreign portfolio investors (FPIs) to understand the pulse of the market.

FPIs have been complaining about restrictions on investments put on debt issuance, but the government removed those in September, as rupee was depreciating.

Still, there are some restrictions in place, such as not more than 20 per cent of the portfolio should be in short-term bonds.

FPIs say the problem with this is that with every year passing a large of chunk of their portfolio gets a maturity profile of less than a year because of accumulated investments and old bonds maturing in two years earlier, becoming that of one-year maturity.

They have to then sell the bonds in the market, even when there is no taker. So the bonds might get sold at a discount. Besides, maintaining the maturity profile is also cumbersome for a thin team managing the FPI office, especially as the foreign investors typically invests in papers maturing within three years.

However, that was a set-back for FPIs for a few months, and they went slow in their bond investments.

“The spreads (between GSec and AAA) have widened because FPIs sold debt papers. The momentum was broken because of various restrictions put on FPI investment and also because of other international factors, if the RBI governor meets FPIs, it may help bringing back the momentum,” said Mahendra Jajoo, head of fixed income, Mirae Asset Global Investments (India).

It is not that FPIs are no taking interest in Indian debt papers. In September and October last year, FPIs sold nearly Rs 20,000 crore in debt papers, but they were positive in November and December. Overall, in calendar year 2018, FPIs had sold Rs 47,795 crore.

The FPIs have exhausted 71 per cent of their corporate bond investment limit of Rs 2.89 trillion. In government bonds, they have used up 74.51 per cent of their investment limit of Rs 2.23 trillion.

The market expects policy rates to remain relatively softer in this calendar, and that should bring help bringing back the appetite of FPIs in India’s debt papers, bond dealers say.