Bond spread set to widen with new 10-yr benchmark

Currently, the spread is 36 basis points

If the Reserve Bank of India (RBI) continues to auction the new 10-year government security (G-sec) 8.83 per cent 2023, which was auctioned on Friday, it will emerge as the benchmark bond, further widening the spread between corporate and government bonds.

Currently, the spread between the 10-year 'AAA' rated public sector unit corporate bond and the current 10-year benchmark G-sec 7.16 per cent 2023 is 36 basis points. The yield on the 10-year 'AAA' public sector unit is at 9.46 per cent.

Last week, Finance Minister P Chidambaram had said that G-Sec yields could fall. “Interest rates in G-sec have risen temporarily, but we hope that some measures the RBI will take, and when the next set of inflation figures come, if food inflation moderates, it's possible that the G-sec rates will go down," Chidambaram had said at press conference after the launch of the Bharatiya Mahila Bank in Mumbai last Tuesday.

With the 8.83 per cent 2023 G-sec becoming the 10-year benchmark bond soon, the objective of falling yield will be achieved since the yield is currently at 8.78 per cent, compared with the yield of the current 10-year benchmark bond 7.16 per cent 2023 at 9.10 per cent.

The first auction of the new 10-year G-sec 8.83 per cent 2023 on Friday was successful. On the Clearing Corporation of India Limited website, it emerged as the third most traded G-sec, and the yield ended at 8.78 per cent on Friday. The second highest traded G-sec was the current 10-year benchmark 7.16 per cent 2023 and the yield ended at 9.10 per cent, compared with previous close of 9.08 per cent.

“The old G-sec will continue to be the benchmark till sufficient volumes pick up in the new bond. This will eventually become a benchmark. If RBI continues to auction this security, then it will eventually become the new benchmark,” said N S Venkatesh, chief general manager and head of treasury at IDBI Bank and chairman of Fixed Income Money Market and Derivatives Association of India.

In the coming week, the yield on the new 10-year G-sec may fall further owing to demand from traders for the G-sec in the secondary market.

“There is a possibility of the yield on this new 10-year bond may fall to 8.70-8.75 per cent level by next week because there is good demand for this bond. Those who have not bought this bond in the auction will be willing to buy from the secondary market,” said Siddharth Shah, vice-president, STCI Primary Dealer. According to Shah, once this bond becomes the 10-year benchmark, the spread between corporate bond and G-sec will widen.

The issuance calendar for marketable dated securities released in September shows that every week, a G-sec in the maturity tenure of 10-14 years will be auctioned. The Street expects this new 10-year G-sec bond 8.83 per cent 2023 to be auctioned again on Friday.

In recent times, yields rose tracking the weakness in the rupee, which has depreciated by about two per cent since the start of this month.