Bond spreads widen at short end as CRR hike sucks out liquidity
Spreads between corporate bonds and government securities have widened at the short-end, but have narrowed for longer-end bonds.
By TNN |
MUMBAI: Spreads between corporate bonds and government securities have widened at the short-end, but have narrowed for longer-end bonds. Dealers attribute this phenomenon to the short-term tightness in the money market caused by the Reserve Bank of India���s (RBI) measures.
The spreads between corporate bonds and government securities hover around 135-145 basis points for bonds in the three-to-five-year tenure. However, they narrow down to 130 basis points on 10-year bonds. ���Typically, when there is a rate hike or an increase in the cash reserve ratio (CRR), its impact is seen more in the short term as the cash condition gets tightened. Hence, most of the bond traders are keen to trade actively in the medium- and long-term securities,��� said IDBI Gilts head of fixed income SS Raghavan.
The spreads between corporate bonds and government securities hover around 135-145 basis points for bonds in the three-to-five-year tenure. However, they narrow down to 130 basis points on 10-year bonds. ���Typically, when there is a rate hike or an increase in the cash reserve ratio (CRR), its impact is seen more in the short term as the cash condition gets tightened. Hence, most of the bond traders are keen to trade actively in the medium- and long-term securities,��� said IDBI Gilts head of fixed income SS Raghavan.
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Most corporates are now preferring to issue bond programmes with a 1-3-year tenure, given that such issues attract adequate subscriptions. Recently, the market saw Nabard, IDFC and HDFC come out with two 3-year issuances, with a coupon of around 9.2-9.7%. It may be mentioned that one month ago, two Tata group companies ��� Tata Power and Tata Steel ��� entered the bond market with bonds issuances that saw huge investor interest.
However, when it comes to the government bond market, traders are wary of RBI hiking the CRR once again to control the rising prices. Rate of inflation for the week ended May 3, ���08 stood at 7.8%, resulting in fresh fears of hike in the CRR. ICICI Securities��� vice-president Manish Luharuka explained, ���Much of the demand from mutual funds has now shifted to the two-three year segment. This has infused greater liquidity into this segment of the market. However, not much active trading is seen in the 5-10-year segment. Over the past few days, even certificates of deposits are witnessing a 10-15-bps spike in yields.���
Going forward, treasury managers feel that yields could be headed northwards across the curve, given the rising inflation numbers. While short-tenure bonds are already feeling the impact, it is widely believed that the long-tenure securities too will not be spared this time around.
When RBI hiked the CRR by 75 bps in April, (one interim hike on April 17 and the other in its annual policy review), the banking system saw ample cash flow, largely due to government spending. Banks, for instance, were seen parking more than Rs 20,000 crore with the central bank through reverse repo operations at the daily window for liquidity adjustment.
However, with the second phase of the CRR hike coming into force from May 10, cash condition has begun to feel the pressure. While there has been a sharp dip in surplus funds parked by banks with the central bank, RBI has now started infusing funds through the repo window. Even overnight lending rates have seen a steep rise to over 7% levels across all markets ��� the inter-bank call market, the repo market and the market for collateralised lending and borrowing obligations.
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