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Informist, Wednesday, Apr. 23, 2025

 

By Aaryan Khanna

 

NEW DELHI - Fixed-income traders are set to favour buying corporate bonds maturing in less than five years following the so-called 'bull-steepening' of the government bond yield curve that has pushed down short-term yields faster than long-term ones following the Reserve Bank of India's interest rate cut earlier this month and continued infusion of durable liquidity.

 

Central government bonds have been the biggest beneficiaries of the RBI's easing of financial conditions in recent weeks, with yields on both the five- and 10-year benchmark gilts falling over 25 basis points so far in April. During this time, the spread between the two papers has doubled to nearly 25 bps. 

 

On Monday, the yield on the five-year benchmark 6.75%, 2029 bond hit 6.06%--the lowest since early 2022. The result has been that the annualised spread of the five-year benchmark corporate bond issued by the National Bank for Agriculture and Rural Development over Indian government bonds of the same tenure has widened by around 10 bps in April to 72 bps--most 'AAA' papers offer even higher returns than NABARD's--even though the Centre has resumed its weekly borrowing auctions and corporate bond issuances have displayed a seasonal slowdown.

 

"While there was a substantial supply of corporate bonds leading up to March, demand has remained robust, supporting price stability and continued investor interest in this segment," said Sneha Pandey, fund manager - fixed income, Quantum Asset Management Co. "Given the strength in demand and the ongoing monetary policy easing, we expect corporate bond spreads to continue to tighten as further rate cuts unfold, which makes them attractive at the given valuations."

 

The search for spreads also comes at a time when the RBI is expected to enforce transmission of its 50 bps of repo rate cuts so far--and another 50 bps or so that is being forecast--by ensuring liquidity remains sufficiently in surplus, which has led to overnight money market rates trading below the repo rate of 6.00%.

 

"A lot of the rally in short-end gilts has already happened, and though there may be some more steepening, additional liquidity could go directly into corporate bonds of up to five years," the head of asset-liability management at a private bank said on the condition of anonymity.

 

THE LCR FACTOR

Short-term corporate bonds are also likely to get a demand push from the RBI's final Liquidity Coverage Ratio norms, traders said. On Monday, the central bank released the amended guidelines, which will come into effect from the next financial year. Not only did banks get an expected relief on the timeline for implementing the new norms, the additional run-off factor for retail deposits enabled with internet and mobile banking facilities was reduced to 2.5% from the 5% mooted at the draft stage last year.

 

As a result, banks' need to buy high-quality liquid assets, which comprise gilts but not corporate bonds, is set to be lower than initially anticipated. This will likely give banks more headroom to grow their balance sheets without picking up government securities to meet regulatory requirements. Other investors have taken note of the same, and expect some slack in demand for gilts maturing in fewer than five years while those with a tenure of 10-15 years may be unaffected.

 

"At the shorter end, corporate bond spreads look good and the safer play," said Akhil Mittal, senior fund manager – fixed income, Tata Mutual Fund. "We expect a bit of flattening in G-sec (government security) curve--that is, the longer-end to perform well."

 

However, some traders still retain a preference for government bonds in the 5-10-year segment ahead of the widely-expected repo rate cuts in June and August. Meanwhile, mutual fund houses are constrained on two fronts: certain schemes only allow investment into sovereign debt and funds which are focused on generating returns from corporate bonds are seeing weak inflows.

 

"The action has shifted to the short-end. But on a total return basis, now the 5-10 year gilts also look attractive," said Dhawal Dalal, president and chief investment officer – fixed income, Edelweiss Mutual Fund. "We are already investing in the 3-4 year duration bucket on the corporate bond side, looking at the spreads. But going ahead, considering inflows into such mandates are not very high, we will have to wait and see on further investment picks."  End

 

Edited by Vandana Hingorani

 

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