Yield spread between corporate bond and g-sec narrows in February

Sentiment was also impacted by VRRR auctions by RBI last week to suck out liquidity

The difference between yields on government and corporate bonds continues to shrink as the former rose following the Reserve Bank of India's (RBI’s) hawkish stance in the Monetary Policy Committee (MPC) meeting. This dashed hopes for any early rate reduction.

Additionally, the sentiment was impacted by the variable rate reverse repo (VRRR) auctions conducted by the central bank last week to suck out liquidity.

Notably, the RBI conducted two VRRR auctions in a day on February 6 and February 7, despite liquidity being in a deficit mode for over four months. Corporate bond yields held steady due to reduced supply in the market.

In February, the yield spread between AAA-rated corporate bonds and the 10-year benchmark government bonds narrowed by 4 basis points (bps).

Comparing the annualised yields, the spread narrowed by 6 bps in the previous week, according to data by ICRA Analytics.

Yield on the benchmark 10-year government bond settled at 7.10 per cent on Tuesday, against 7.06 per cent on February 1.

The yield on AAA-rated corporate bonds of similar maturity was steady around 7.61 per cent during the same period.

Indian companies and banks have raised Rs 15,207 crore through corporate bonds in February so far, against Rs 74,231 crore in January, according to data by Prime data base. Supply in corporate bonds stood at Rs 1.07 trillion in December.

“There is a combination of both lower supply and a bit illiquid nature of corporate bonds. It takes some time for corporate bonds to track government bonds, as the latter is more liquid and there is an auction every week,” said Ajay Manglunia, managing director (MD) and head (investment grade Group), JM Financial. “The government bonds had rallied at first, post Budget. Then the yields went to 7.10 per cent (benchmark 10-year bond),” he added.

The borrowing estimate for the financial year 2024-25 was lower than market estimates. The government aims to borrow Rs 14.13 trillion through dated securities in the next financial year. This is against the current financial year's gross borrowing estimate of Rs 15.43 trillion.

Net borrowings for the next financial year, starting April 1, are pegged at Rs 11.75 trillion. The borrowing programme for the current year ends on Friday. The government plans to borrow Rs 30,000 crore at the last auction.

“In March, because of demand outstripping supply, the yields on government bonds should cool off,” said the treasury head at a private bank.

“While government securities yields have inched up in the previous few trading sessions, state bond yields on week-on-week basis have cooled off. So, March should be better than February,” he added.