With No PSU Bond Is­sues in 2 Months, Yield Spread Shrinks to 40 bps

The Economic Times - - Markets & Finance - SAIKAT DAS

The yield spread -- a gauge for pric­ing -be­tween AAA-rated 10-year pub­lic sec­tor com­pa­nies and the bench­mark govern­ment bonds has nar­rowed to 30-40 ba­sis points from the usual 60-80 bps as state-owned en­ti­ties stayed away from fresh is­suances in the last two months. A ba­sis point is one-hun­dredth of a per­cent­age point. Bond yields move in­versely to prices. Ex­ist­ing bond hold­ers, who bought those se­cu­ri­ties from the pri­mary mar­ket af­ter Au­gust last year at a higher coupon rates due to suc­ces­sive rate hikes, would now make a profit by sell­ing them. For ex­am­ple, REC had is­sued a tenyear paper in April last, car­ry­ing a coupon of about 8.04%, while it of­fered a coupon in the range of 9.50-9.75% af­ter Au­gust for sim­i­lar ma­tu­rity. How­ever, new buy­ers like prov­i­dent or pen­sion and in­sur­ance funds would ac­quire those se­cu­ri­ties at a higher price due to the yield-squeeze, in­di­cat­ing rise in prices, deal­ers said. “For an in­sur­ance or prov­i­dent fund, it still makes sense to in­vest as they look for safety of in­vest­ment rather than su­per re­turns,” said a debt fund man­ager. State-owned com­pa­nies like Ru­ral Elec­tri­fi­ca­tion Cor­po­ra­tion, Power Grid Cor­po­ra­tion, Power Fi­nance Cor­po­ra­tion, In­dian Rail­ways Fi­nance Cor­po­ra­tion are some ma­jor is­suers. “The spread is a func­tion of liq­uid­ity and de­mand phe­nom­e­non,” said Ashish Ghiya, man­ag­ing di­rec­tor, Deriv­ium Trad­ing Se­cu­ri­ties (In­dia). “It tends to squeeze when mar­ket is in a bullish mode or run­ning short of sup­plies. How­ever, is­suances are likely to in­crease in June. Long-term in­vestors seem to buy those pa­pers from the sec­ondary mar­ket.” For the last few days, the ten-year bench­mark govern­ment bond yield has been trad­ing in the range of 8.70-8.80% semi­an­nu­ally, which would come around 8.909.00% if cal­cu­lated on yearly ba­sis, down about 40 bps from sim­i­lar ten­ure PSU se­cu­ri­ties in the sec­ondary mar­ket.

New buy­ers like prov­i­dent or pen­sion and in­sur­ance funds would ac­quire those se­cu­ri­ties at a higher price due to the yield squeeze

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