With no PSU bond issues in 2 months, yield spread shrinks to 40 bps

MUMBAI: 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 8.90-9 .00% if calculated on yearly basis, down about 40 bps from similar tenure PSU securities in the secondary market.