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