Record borrowing by states to widen spread over govt bond yield: Traders

Indian states' borrowing in the last quarter of the current fiscal is likely to prompt investors to seek higher premiums over federal government debt, leading to a wider yield spread, several traders said on Tuesday.

Earlier in the day, states raised Rs 16,000 crore ($1.92 billion), the lowest for a weekly auction, via 10-year bonds at around 7.74 per cent.

The 10-year benchmark bond yield was around 7.21 per cent, marking a spread of 53 basis points, compared to around 48 bps last week.

The spread was the widest in over two years, and traders anticipate further widening in the coming weeks.

"Premium collection with insurers has improved, and the supply could be absorbed by them, but spread widening with government bond yields is not ruled out and should happen," said Alok Singh, group treasury head at CSB Bank.

States are scheduled to borrow a record Rs 4.13 trillion ($49.57 billion) in the quarter, over two-thirds of the previous three quarters combined, a release on Friday showed.

Having raised Rs 6.04 trillion from April-December, if the January-March borrowing schedule is fully utilised, states' annual borrowing would cross Rs 10 trillion for the first time ever.

"State bond yields have remained artificially lower for a long time, but with supply rising, we expect them to rise to 50-60 basis points, and at these levels we would be on the buy side," said Aneesh Srivastava, executive director and chief investment officer at Star Health Insurance.

Traders also said that demand for ultra-long central government bond yields will be impacted, as this segment is generally bought by long-term real money investors.

The 30-year and 40-year yields were around 7.45 per cent, and traders anticipate their spread with the benchmark yield to widen to around 30 bps by the end of March, from 25 bps currently.