Corporate bond spreads
MURUGAVEL
Hi friends,
I was examining some data for the last few months and found something that appears a bit counter intutive. The corporate bond spread ( spread between AAA corporate bond and G Security) for same tenor is higher in the near term than the long term.
As on 23rd Nov , the spread for 10Y AAA was 73 bps , 5Y AAA was 74 bps , 1Y AAA was 124 bps and 3M CP was 178 bps.
The spread exists because of the perceived credit risk of Corporate bonds. What could be the reason for this difference ? The comparison is made considering only similar rated bonds ( AAA) vs G Sec/ TB. Inflation, Tenor preference, liqudity etc as a cannot be reasons as these affect both GSec and Corporate bonds.
Why is the market is probably perceiving a higher level of uncertainty in the short term than the long term ( which is a bit counter intuitive ) ? . Infact, the yield on 3M CP is higher than 1Y AAA by around 20 bps.
Cheers,
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J.Murugavel
Bharathidasan Institute of Management
PB No 12, MHD Campus, BHEL Complex
Thiruchirapalli 620014
Hand phone: 72001 01042 / 93633 14015
Ashok Alexander
Dear sir,
On G-secs:
RBI had announced buy back of Rs.12000 Crs & there is further possibility of RBI repeating the same based on liquidity concerns in the market. There is G Sec redemptions happening in January & February 2011, adding to this we can see the year end spending by govt & year end buying by the Financial Institutions like LIC, & others will create a very healthy demand for G Secs in the last quarter of the FY 2010.Also, Inflation number coming down to between 5.50% to 6% by March end (estimates of RBI) will also help yields of G Secs to cool off below 8% mark.
Hence, after hovering between 8-8.10%
levels over the next few months more, G Secs yields will cool off to
between 7.50 to 7.75% in the next quarter beginning January 2011.
AAA short term yield is high on high interest rate expectation. Do agree with the fact higher tenure bond should be more riskier than short term.
Regards,
Ashok
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