MUMBAI, Nov 11 (Reuters) – The supply of Indian corporate bonds may increase in the future, but their narrow spread to government bond yields currently makes them a relatively unattractive investment, a senior official said on Friday. fund manager of IDFC Asset Management Co.
“We believe that while absolute levels offer value, the current tight spreads still favor government bonds over corporate bonds,” said Gautam Kaul, senior fund manager, fixed income at IDFC AMC. .
“Corporate bonds will become more attractive once the spread approaches long-term averages.”
Historically, the spread between AAA-rated corporate bond yields and government bond yields has been in the range of 70 basis points (bps) to 80 bps. But that has become almost flat in recent weeks as government bond yields have fallen.
Still, if investors want to opt for corporate bonds, then the three- to five-year portion of the curve currently offers the most value, Kaul said.
The supply of corporate papers has been weaker so far this year as the Reserve Bank of India’s aggressive interest rate hikes sent yields soaring at the start of the year.
Kaul expects supply to increase across the board as economic activity returns.
“It is reasonable to assume that the upward trend in credit demand should also start to be reflected in the supply of corporate bonds.”
Typically, companies have to pay higher rates than the government to compensate for the perceived higher risk. But top-rated companies have enjoyed a much lower spread than historical norms lately, making this debt a less rewarding and riskier bet.
For example, AAA-rated state-owned Housing and Urban Development Corp (HUDC.NS) issued three-plus-year bonds at a coupon of 7.54% earlier this week.
By comparison, the yield on benchmark three-year government bonds ended at 7.42% on a semi-annual basis on Thursday.
Yields on government bonds tumbled on Friday, falling 10 to 15 basis points across the curve and following a similar move in US yields after inflation fell in the world’s largest economy in October.
Cooling inflation could lead the Federal Reserve to slow its rate hikes, which could prompt the RBI to follow suit.
Kaul expects the RBI’s repo rate to peak in the 6.25% to 6.50% zone, after rising 25 basis points to 35 basis points in December.
Reporting by Dharamraj Dhutia; Editing by Savio D’Souza
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