Bond spreads might remain at current levels till RBI monetary review

Most corporates are postponing their bond issuance due to expectations of further fall in coupon rates

With expectations rising of a repo rate cut in the coming monetary policy review of the Reserve Bank of India (RBI), the Street expects a further drop in yields of government and corporate bonds.

However, the 10-year bond spread is expected to remain at current levels. Bond spread refers to the difference between the yields of two bonds.

Few companies have tapped the domestic bond market but most await RBI’s monetary policy announcement on May 3. If the apex bank cuts the repo rate, the coupon rates of corporate bonds will drop.

Currently, the spread between the Fixed Income Money Market Derivative Association of India (Fimmda) 10-year ‘AAA’ rated public sector undertaking (PSU) corporate bond yields and the 10-year benchmark government bond yield is 88 basis points. The yield on the former ended at 8.63 per cent and the latter at 7.75 per cent, respectively.

However, yields on corporate bonds have not dropped in line with those of government bonds. “Government bond yields move faster and corporate bonds are not as liquid as government securities, so the yield has not dropped so much. The fall in corporate bond yields will happen with a lag effect,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

Since the start of this month the yield on the 10-year 8.15 per cent 2022 benchmark government bond has dropped 24 basis points while the fall in yield of the Fimmda 10-year ‘AAA’ rated PSU corporate bond has been 16 basis points.

 

By May 3, the Street expects yields on corporate bonds to fall almost in line with those of the government bonds. Yields on corporate bonds will fall amid lack of issuances in the market and good demand by investors.

There is a lack of issuance because most issuers are in the process of closing their books of accounts. “The yield on the Fimmda 10-year ‘AAA’ rated public sector undertaking corporate bond might drop by another 20 basis points before May 3,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

 

Similarly, the yield on the 10-year government bond is also expected to drop further. “By month-end, the yield on the 10-year benchmark bond may fall to 7.6 per cent,” said Siddharth Shah, vice-president, STCI Primary Dealer.

According to Shah, this week the yield on the 8.15 per cent 2022 bond is headed towards 7.65 per cent.